What can Eeyore and Tigger Teach Bernanke About Monetary Policy?

What can Eeyore and Tigger tell us about the current state of monetary policy?  A lot.  At least that’s the argument that Betsey Stevenson and I make in our new column for Bloomberg View.

The Fed is now engaged in the game of “forward guidance”—they’ve announced that they anticipate keeping interest rates at zero, until late 2014—and hope that it will shape the recovery.  But what effects will this announcement have?  To figure this out, let’s visit two of the greatest ever Fed Chairmen: Eeyore and Tigger.

Bernanke Speaks. But What Did He Say?

So Ben Bernanke finally spoke today. And as I predicted yesterday, all the early headlines are expressing disappointment that Ben didn’t announce QE3. But this disappointment is misplaced. New policy announcements are for the Federal Open Market Committee, not the Chairman. The most he could do is give an indication of where he thinks things will go.

And he thinks they should ease policy.  Soon.

Here’s the case he made:

1. Unemployment is too high. This is the usual argument for easing monetary policy.

2. Inflation is below target. The usual constraint preventing this doesn’t bind.

3. The possibility that high long-term unemployment may persist “adds urgency to the need to achieve a cyclical recovery in employment.” There’s a special reason to be more aggressive.

Previewing Jackson Hole: Why Markets Are Setting Themselves Up for Disappointment

On Friday all econ-loving eyes will be focused on Jackson Hole, Wyoming. Think of it as Oscar night for macroeconomists. Except with sensible shoes rather than plunging necklines. But the anticipation and gossip is just as intense. Markets are convinced that Ben Bernanke’s going to make a major announcement. I disagree.  Here's why:

1.       Central bankers generally try to be more boring than their audience wants them to be. That won’t change.

2.       The run of data since the last Fed meeting hasn’t really changed, so why would monetary policy?

3.       Given the slim governing coalition, Ben can’t get too far ahead of the rest of the committee. So look for all the action to come from official Fed statements, rather than cryptic hints at Jackson Hole.

4.       Sometimes Fed Chairmen are accidentally more interesting than they mean to be. At last year’s conference Big Ben shared some of his thinking about alternative monetary tools. This was news in 2010, and it excited the markets. But today, we’ve all thought long and hard about the alternatives, so it’s hard to see a surprise coming.

The Washington Post Profiles Ben Bernanke

A thoughtful piece in the Washington Post on Ben Bernanke is extremely laudatory about his new approach at the Fed. I still worry that in the end that the government will have spent trillions too much to fight a recession and that economic growth will suffer for decades. There is a real principal-agent problem at […]

More on the Missing Macroeconomists

On the bright side, that leaves a lot of running room for policy-oriented economists like me! On the dark side, that means that economists are often under the streetlight rather than closer to where their keys might be.

The FREAK-est Links

Lowenstein on Bernanke (Earlier) (More here) Which company insiders are buying a lot of their own stock? How does pregnancy affect memory? What’s the value of melancholia?

Your Hedge Fund Questions, Answered

A few days ago, we solicited your questions for hedge fund manager Neil Barsky. As always, your questions were terrific, and so are Barsky’s answers, below. One thing that surprised me, however, is that nobody asked Barsky, a former Wall Street Journal reporter, what he thinks about Rupert Murdoch‘s purchase of the Journal (and the […]

The New head of the Federal Reserve, Ben Bernanke

Everywhere I go, people are asking me what I think of the new chairman of the Federal Reserve, Ben Bernanke. I know Bernanke pretty well because he was Chairman of the Princeton Economics department at a time when I was very seriously thinking of moving there, but ended up turning down offers on multiple occasions […]