Wall Street Journal September 19, 2013
The Fed chief shrinks from bond tapering even in his final days.
Did we miss Janet Yellen's nomination to be the next Federal Reserve chairman? We could swear that was still Chairman Ben Bernanke answering questions Wednesday at his quarterly press conference, but the Fed's decision to renege on beginning to taper its bond purchases sounds like Vice Chair Yellen, the famous monetary dove, may already be in charge.
That is at least as logical an explanation as the two reasons that Mr. Bernanke offered Wednesday for the Fed's surprising policy blink. The Fed chief cited the dangers of recent market "tightening" in the form of higher long-term interest rates, as well as the risks of fiscal "drag" from Congress.
But the markets have merely been responding modestly to the prospect of tapering that Mr. Bernanke has been signaling. No Fed Chairman in history has put more stock in offering "forward guidance" to financial markets. For him now to shrink at the market reaction he must have anticipated to his tapering guidance suggests a large failure of nerve. It also undermines the credibility of the Fed's future policy guidance.
As for fiscal drag, Mr. Bernanke and the Fed have been predicting faster growth in the second half of the year precisely because they said the fiscal impact of January's tax increases would ease over time. Blaming Congress now when the chances of another tax increase are minimal and spending cuts are modest looks less like an explanation and more like an excuse for the Fed's continuing mistake in overestimating future growth.
And we do mean continuing. As the nearby table shows, the Fed has persistently predicted that its policies would lift the economy to a faster pace of growth, only to be disappointed. In mid-2011, the "central tendency" prediction of its monetary officials was for GDP growth in 2013 of between 3.5% and 4.3%. Now that tendency for this year is 2% to 2.3%, and even that's optimistic considering the first half of the year was only 1.8%.
An intrepid reporter asked Mr. Bernanke on Wednesday to explain these mistaken forecasts, and the chairman conceded the point. But he countered that the Fed had actually underestimated the decline in unemployment, adding that in any event it now "appears" that the financial crisis has doomed the economy "at least temporarily" to a slower rate of potential growth. That isn't what the Fed has been saying the last five years.
The alternative explanation, which Mr. Bernanke won't concede, is that the Fed's monetary exertions haven't worked as planned. Near-zero interest rates and bond purchases helped the economy amid the 2008-2009 panic, but after nearly five years the undeniable reality is that they haven't delivered faster growth. Mr. Bernanke isn't about to concede policy failure. So his contradictory retort is essentially that these policies have worked, but because they haven't worked well enough they must be continued.
For Mr. Bernanke to blink even as he is heading out the Fed door shows how difficult it will be to return to monetary normalcy. If he begins tapering before he steps down, he might at least force his successor as chairman to think hard before changing course.
But if even Mr. Bernanke feels he can't stop, with all of his popularity on Wall Street and Washington, then imagine the pickle for the next Fed chairman. All the more so if President Obama's nominee is Ms. Yellen. She leads the Fed's dovish wing and at key decision points in the last five years has wanted to go even further in the easing direction than Mr. Bernanke.
For now at least, Wall Street and Washington will be pleased. Stocks rallied Wednesday because investors think the Fed's decision means an even more extended run of accommodative policy. They're probably right, but it still leaves the question of when the Fed will ever have the political fortitude to stop the music.