As Fed Chairman Ben Bernanke gets ready to face the Congress after his reconfirmation to deliver his semi-annual monetary policy report on February 24th and 25th of this week, he is expected to assure the markets and elected officials that the Federal Reserve will not raise rates until the jobs picture improves and that he is aware of concerns about inflation.
Assurances such as those may provide imminent comfort to the moody country which is experiencing its pre-menstrual syndrome with the snow battering outside, similar to comfort food, as the climate turned from one of decade-long warming to perhaps several years of cooling. Even the snow on the streets could take several weeks to melt, let alone the polar ice caps. So, can his assurances make his forecast any better, as the electricity bills of Americans rise trying to stay warm in the long cold winter before Vice President Joe Biden’s spring arrives in January 2013, after the reelection, and not in March 2010 as he had heralded? Perhaps not.
The economy’s so called ‘excess capacity’, once used up, will still result in the outcome of around 8 per cent unemployment and 2 per cent growth rate, with inflation above 4 per cent by 2011, barring any other opportunistically unforeseen negative shocks. The issue is not excess capacity, but increasing the excess capacity, so that the space to fill up is not to 2 per cent growth rate, but to 4 per cent growth rate. He may not have the chance to raise the federal funds rate to 4 per cent to match the 4 per cent inflation before the markets ask for cheap(er) money once again. The economy is being strung along by Washington with comfort food and sweet talk to perpetuate the status quo.
“I will not raise rates until jobs come back” is akin to saying “I will not stop giving you candy until you finish your homework.” The markets will take their time to do their homework, because they can keep getting candy from the country’s only dispenser. Preparing the country for low expectations of itself in the name of rational expectations is also expectations, but not effective expectations. The candy should be the reward of profits from sound investments which is the homework of the markets, not the easy money upfront for spending as little of it as possible on real work.
The Fed Chairman, if he is serious about keeping his confirmed job beyond November 2010 so that he does not join the unemployment line because the elected officials who voted to reconfirm him could, is to tell the markets and the elected officials that he is not willing tolerate more than 5 per cent overall consumer price index (CPI) inflation, not the core inflation obtained when food and energy is conveniently subtracted even as people starve when their unemployment runs out or shiver when they can’t pay their heating bills with the core of the economy collapsing around the Fed building on Constitution Avenue ― the supposed caretaker of the nation’s economic security in the gratuitous privilege of its ultra secret central bank independence. It would then be up to the politicos and the financiers to figure out what they want to do in the interim as inflation, all other things being normal, creeps up from 3.0 per cent in the period between January 2009 to January 2010, gradually, to more than 4 per cent by year end in the year calendar year 2010, just in time for both high inflation and high unemployment to tighten the noose around the Fed’s neck after the November election.
The entire short run Phillips Curve would have shifted out. Growth will still not have averaged out along the self-sustainable path of 2 per cent by mid-2011, as both social unrest and unrest over government obligations to deal with that social unrest rise in the political corridors of Washington. The Fed will then be forced to raise rates to deal with the impending stagflation to slow down growth, which is a matter of TIME and Foreign Policy.
Then, the next election season will begin and the turmoil over the President’s economic team will rise to a furious pitch, similar to Bush in 2006 over Iraq. In the political blame game, policy will be sacrificed until political parties change again in Washington or to do the right thing after all other options have exhausted in the self-aggrandizing, unscrupulous and irresponsible careerist morass of the nation’s power corridor from Boston to Washington ― from the academics, bureaucrats and the press to the political appointees and their elected bosses. And this time it could be too late, hardening the future of the country in concrete without the infrastructure being renewed.
The Council of Economic Advisers’ (CEA) forecast for 2016 is unacceptable. 2016 is 9 years from 2007, when the crisis began. Even if the jobs return by 2013, it would be 6 years from 2007. The Fed and the administration must take job creation seriously beginning now to put the economy on a sustainable path back to 4 per cent unemployment sooner than later.