Speaking today at the Boston Federal Reserve Bank, Fed chairman Ben Bernanke said what many were expecting him to say — it looks like the Fed is interested in giving a jolt to our slow-growing economy. But as others have pointed out, it’s not clear how that will happen.
“[T]he FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate,” Bernanke said. At the same time, he acknowledged that the effects of Fed purchases of long-term debt securities are not quite known, and so the central bank should be careful:
One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public. These factors have dictated that the FOMC proceed with some caution in deciding whether to engage in further purchases of longer-term securities.
Bernanke said that the risk of deflation is still present, and that there’s reason to believe that inflation may stay at current low levels for a long time — a situation that he feels the Fed should act on. But he didn’t give any additional signals as to what action the central bank might take.
There is one solution on the table. By convincing Americans that the Fed is targeting inflationary policy, the bank may be able to encourage people to spend dollars. However, it’s difficult to tell the extent to which the Fed’s words alone would influence the markets. In any case, if Bernanke sees the way forward, he hasn’t told us what it is.