The Federal Reserve isn't known for making feisty speeches. The independent US central bank prefers to do its work quietly -- in Washington, but miles away from the hyperpolitical tenor of Beltway debates.
But in yesterday's speech to the European Central Bank in Germany, Fed Chair Ben Bernanke delivered what might be his most pointed speech yet. He hit back against critics of his new $600 billion stimulus, a new wave of US Treasury purchases he hopes will raise inflation and lower interest rates. (Read our FLASHCARD explainer on the Fed's plan.) He unleashed barely veiled attacks against undervalued currencies in China and other emerging markets. And, for the first time, he called on US lawmakers to pass another round of stimulus.
In Bernanke's own words:
The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.
In my words: The recovery will not live on quantitative easing alone. We need Congress to step up and pass another round of tax cuts or spending increases to give states and families firepower in the cool recovery.
Like biblical verse or passages from the Constitution, these sentences could be used by either side to make whatever point they want. Conservatives might say: Extending the Bush tax cuts forever will enhance growth today and slashing discretionary spending will reduce deficits tomorrow. Liberals might say: Passing another state rescue and jobless benefit bill will help families today and raising tax rates on the rich will reduce our deficits tomorrow.
But rather than serve as an inspiration to both sides, the Federal Reserve has increasingly been a target of both foreign and domestic criticism.
The bank's recent decision to print $75 billion a month in 2011 and buy medium-term securities from banks to reduce interest rates has rankled net exporters like China and Germany, who fear that by expanding the supply, and weakening the value, of dollars, we will hurt their export figures. It is true that this round of quantitative easing has the side-effect, or secondary motive, of devaluing the dollar to help US exports. But its primary motive is to fix our economy: to increase loans to business and families, and to increase demand and employment.
So if we're mostly worried about the domestic economy, who are the domestic critics? Mostly, the American right. Sarah Palin accused the Fed of stoking inflation. Bill Kristol agreed. Senate Republicans now want to change the Fed's charter from a dual mandate to support steady prices and low unemployment to single mandate to worry about prices, only. (I'm with Paul Krugman here. Taking the Fed off unemployment duties with one sixth of the country out of work is lunatic -- like California laying off thousands of firefighters only after a SoCal conflagration breaks out.)
Inflation is a legitimate fear. But this is not a legitimate time to fear it. Core inflation -- a key measure of the froth generated by our economy -- is running at its lowest rate on record, and it has been at zero for three months. By contrast, the Fed's target is two percent. There is no evidence that high inflation is in our near future. There is, on the other hand, copious evidence that high unemployment dominates our present.
The Federal Reserve has stood up and taken licks for coming to the defense of the US economy. Now, as Bernanke said in Europe, it is Congress's turn. Who's feeling brave out there?