On jobs, is Bernanke aggressive enough?

Federal Reserve Chairman Ben S. Bernanke has left his mark on economic history not once but twice, using almost every weapon in his arsenal to quell the financial panic of 2008 and then to lift the U.S. economy out of the recession that followed.

But now, in the latest and perhaps final chapter of his public life, that legacy could be recast if he misjudges the nation’s slow-going economic recovery. A debate is raging over whether Bernanke should become more aggressive about reducing joblessness or continue a more restrained approach.

With the Fed’s policymakers taking no new action at their meeting last week, Bernanke is staying cautious for the time being, reserving the central bank’s more powerful weapons in case the recovery stalls. Some economists say this is the right policy for a recovery that seems to be gaining stream. But, if the unemployment rate, which stands at 8.3 percent, does not continue to decline at a fast pace, critics say Bernanke’s legacy could be impugned.

“If we end up with a few more years of unemployment in the eights, which is not out of the question, people are going to say Bernanke did a good job at the heart of the crisis but dropped the ball when people were still suffering,” said Christina Romer, an economics professor at the University of California-Berkeley and former chief economist to President Obama.

Bernanke, who’s expected to step down at the end of his term in early 2014, has won praise from economists for his response to the financial crisis and recession. He stretched the authorities of the Fed to keep markets stable and pumped trillions of dollars into the economy through bond purchases to spur lending and hiring.

He must now decide what steps the Fed should take to influence the economy at a time when it is showing new signs of vigor but also facing threats, such as from Europe’s financial crisis. Bernanke has shunned dramatic measures he once advocated as a scholar, when he insisted that central banks have the responsibility to take steps to boost growth if it is lacking.

“If the Bernanke of 2000 listened to a news conference of the Bernanke of today, the old Bernanke would say the new Bernanke is not doing everything he can,” said Laurence Ball, an economist at Johns Hopkins University who has written a paper on Bernanke’s shift.

Still, many economists say that Bernanke has a host of good reasons not to push the Fed to do more than it is already doing, which includes announcing that the Fed is unlikely to raise interest rates from their ultra-low levels no sooner than late 2014. The U.S. economy is facing different — and less severe — challenges than during the financial crisis and its immediate aftermath.

“I’d say his performance up to now has been exemplary,” said Stuart Hoffman, chief economist at PNC Bank. “I’d say history will judge him as the right man for the right time to do what he needed to do.”

Hoffman noted that Bernanke can always reverse course and take new action if needed. “If the economy slows down and his group does something, that would add to the legend,” he said.

Another reason that Bernanke may choose not to take additional action is inflation. While it is below the Fed’s target of 2 percent — and is projected by Fed economists to remain so — it is substantially higher than it was several years ago when the Fed took its most dramatic actions to stimulate growth.

“Their forecast is really only a little bit below goal right now, so they’ve got less of that scope to move,” said Vincent Reinhart, a Morgan Stanley economist and former Fed official.

Several Fed policymakers, joined by many lawmakers and some outside economists, worry that if the Fed floods the economy with more money, it will create a swell of demand that will in turn cause higher levels of inflation. Fed officials, including Bernanke, worry that higher inflation would first and most significantly hurt middle-class Americans, who would see the price of food and other essentials zoom up.

Bernanke must take into account of the views of others on the Fed’s policymaking board as he seeks to forge a consensus.

And as he tries to protect the Fed’s independence, he must also keep an eye on how its actions would be greeted on Capitol Hill, where he has come under fire from some Republicans. The Republican presidential candidates, meanwhile, have criticized Bernanke on various counts, saying he has printed too much money, damaged the value of the dollar and carried out programs that simply haven’t worked.

“I think to ignore kind of the populist outrage at some of the stuff they’ve done would be unwise,” said Anil Kashyap, an economist the University of Chicago. “You have to make the case that the things you do are reasonable and won’t backfire.”

As a scholar, Bernanke was famous for advocating a range of policies that could have dramatic effects on economic growth — having a central bank create money to pay for tax cuts, for example, or setting a higher inflation target of 3 to 4 percent. In those writings, he also said such actions were important to prevent wages and prices from declining.

Bernanke has been moderating his views on what steps the Fed should take for years, but some economists who favor more action question whether he has gone too far in the other direction.

These critics question whether the Fed is striking the right balance in carrying out its two legal responsibilities: fostering stable prices and maximum employment. The unemployment rate of 8.3 percent is far above the 5.2 to 6 percent rate the Fed considers normal, while the inflation rate of 1.5 to 1.8 percent is below the Fed’s target.

The Fed said last week that it expects the unemployment rate to come down only gradually over the coming years. A projection released in January suggested joblessness might be as high as 7.6 percent in 2014.

“I think there’s a good chance that the Fed will be criticized after the fact for not being aggressive enough,” said Jan Hatzius, chief U.S. economist at Goldman Sachs. “One important strand of history is going to say, if they had done more and given the recovery a bit of an extra push, you would have been able to bring down the unemployment rate more quickly and avoid permanent damage” to the labor market.

Zachary A. Goldfarb is policy editor at The Washington Post.
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