House Budget Committee Grills Fed Chairman Bernanke

From the NYT:

The Federal Reserve chairman, Ben S. Bernanke, faced harsh questions Wednesday about the central bank’s efforts to stimulate the economy, in his first hearing before the new Republican majority in the House.

“My concern is that the costs of the Fed’s current monetary policy — the money creation and massive balance sheet expansion — will come to outweigh the perceived short-term benefits,” Representative Paul D. Ryan of Wisconsin, the new chairman of the House Budget Committee, said in his opening remarks.

Mr. Ryan expressed alarm about “a sharp rise in a variety of key global commodity and basic material prices,” as well as the recent rise in yields in longer-term Treasury securities.

While acknowledging that consumers in the United States were not yet experiencing higher prices, Mr. Ryan warned that “the inflation dynamic can be quick to materialize and painful to eradicate once it takes hold.”
See the Video on C-Span.

Quantitative Easing

Before too much time passes, for 2302, some background on the concept of "quantitative easing" which is a technique used by the Federal Reserve Board to inject cash into the U.S. economy. The technique is being considered in part because while some argue additional stimulus is needed to continue priming the economy, Congress has no intention to do so, so the Fed has the means to do it independently. Normally the Fed would simply lower interest rates, but they are set close to zero, so that's not an option.

- Wikipedia: Quantitative Easing.
- Support from US News.
- 9 Reasons why it is bad for the economy.
- Kicking the Fed.

Bernacke Explains the Financial Crisis

From a couple months back:
- the transcript.

Two Statements From Ben Bernanke

1 - The aggressive government response to the recent financial crisis prevented a depression worse than the one in the 1930s.

2 - The aging American population is creating strains on the fiscal health of the country and must be addressed immediately.

File this under economic policymaking and the executive branch, among other things.

The Feds Cut Interests Rates

Monetary policy is in the news today. The Federal Reserve Board cut the federal funds rate and the discount rate today by large margins. Each by half a percentage point.

This was the first time the federal funds rate was cut in four years and the first time since Ben Bernanke became chair of the fed.

Both actions reduce the cost, to banks, of borrowing money, and in turn affect the amount that they then charge you and I in interest rates on credit cards, car loans and home mortgages.

Their actions are an attempt to infuse cash (liquidity) in to the economy following the collapse of the subprime mortgage business. It also provides an indication to the business community how the fed under Bernanke will act in the future when faced with financial issues. The rates had risen in small increments over the past four years, which indicated that the fed was worried about an overheated economy that could become inflationary. The chief concern right now is recession.

The markets do not like uncertainly. Once they figure out the behavior of a fed chairman (like Alan Greenspan) they tend to want to keep them in place so they know what to expect when they are called to make a decision. Chairman tend to hold on to their jobs for 10-15 years, which allows a degree of stability to the economy. Now they have their first indication about what Bernanke is inclined to do.

1--Give a clear statement regarding the fed's intent ("The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time."
2--And make a significant change that will make it less likely that further changes are necessary.

Both are different than the activities of his predecessor who was famously cryptic in his statements and gradual in his rate cuts or increases.

When we cover the fed and economic policymaking in the last section of 2302, I try to point out that an advantage of monetary policy as a macroeconomic instrument is that it allows for quick response to changing economic circumstances. The fed already has statutory authority to raise and lower rates and so we don't have to worry about the politics associated with congressional action.