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.