Despite all the “irrational exuberance” April 26 surrounding the first-ever news conference conducted by a Federal Reserve bank chair, the issues that Chairman Ben Bernanke chose to dance around were equally unsurprising as those he managed to address, says Michele Boldrin, PhD, chair of the Department of Economics in Arts & Sciences at Washington University in St. Louis.
“He forgot to mention that the quantitative easing (QE2) program is, for the most part, a process of monetization of the debt that may backfire no matter how carefully one monitors it, and that long-run interest rates are roughly where they were before the QE2 started. But I do not believe he could have said that and also kept his job,” Boldrin says.
Boldrin, the Joseph Gibson Hoyt Distinguished Professor in Arts & Sciences, says Bernanke’s news conference provided little that he would find “surprising.”
“Just think about it,” Boldrin says. “In the face of a ballooning U.S. debt, of an administration and a Congress incapable of putting a credible stop to it, and of an explicit request from the formers to keep interest rates low by buying part of the debt, which choices did the Fed have? None.
“So he is buying the debt while acknowledging that for a complete solution to the deficit/debt problem, political agreement on meaningful budget cuts would be necessary,” he says.
Boldrin says Bernanke acknowledged the long-term deficit problem, but realistically argued that the Fed’s contribution to its solution is to implement monetary policy that will lead to healthy growth in the economy.
“The decision to continue through June with the second round of quantitative easing, in the form of a bond-purchasing program, was expected,” he says. “Also, I expected the chairman to repeatedly tell the audience that the Fed was monitoring the economy carefully, ready to respond with appropriate monetary policy to significant deviations in either inflation or growth.
“What else could he say? That he does not care and will not pay attention?”