The 12 Words Standing Between Us and a Recovery

The Fed really, truly wants to jump-start the economy. Just not if that means jump-starting the economy.


Meet the new crummy economy. Same as the old crummy economy.

That's the bleak message from Jon Hilsenrath's preview of what the Federal Reserve might do to spur the sputtering economy. If you were hoping Ben Bernanke might start paying attention to some professor from the 1990s named Ben Bernanke, well, I'm sorry. That's not on the agenda.

So, what is on the agenda? If you want all the gory details, you can read them here. Or you can just read the twelve bolded words below. They tell you all you need to know.

Determined to keep trying to get the economy going without causing inflation,
the Fed is exploring other novel measures.

The Fed says it wants to jumpstart the economy -- but not if that means jumpstarting the economy. There is just no scenario where the Fed pushes up growth without pushing up inflation. That's why the Fed's apparent 2 percent inflation ceiling makes any more bond-buying more sideshow than solution.

But wait. Isn't inflation a bad thing? No. A little inflation is healthy. Too much is a problem, but so is too little. Remember, when we talk about "inflation" we're not just talking about the price of goods going up. We're talking about wages going up too.

Think about it this way. Right now, consumers aren't spending because they have too few jobs and too much debt. And businesses aren't investing because consumers aren't spending. It's a Catch-22. If consumers would spend, businesses would invest -- but businesses need to invest for consumers to have the jobs they need to be able to spend.

Enter inflation.

More inflation would reduce the real burden of debt and increase the incentive to invest. Households could pay back their debts with less valuable dollars -- and dollars being less valuable would make corporations less likely to sit on cash. In other words, consumers have more reason to spend and businesses have more reason to invest. Impasse passed.

Or think about it this way. A higher inflation target would raise the speed limit the Fed has put on the recovery. Right now, the Fed has signalled that they won't tolerate inflation much above 2 percent. But imagine that the economy does finally hit so-called "escape velocity" and we start regularly adding 250,000-plus jobs a month. That would probably push inflation up -- and the Fed would probably respond by tightening policy. As Matt Yglesias pointed out, this reality makes the Fed's commitment to growth without inflation something close to magical thinking.

Let's try one last thought experiment. Say that everything about the economy was the same but interest rates were at 5 percent instead of zero. The Fed would almost certainly be cutting rates today. That's what the Fed does when unemployment is above target and inflation is below target. (And markets expect inflation to stay under 2 percent for the next five years). But the Fed insists on backing itself into a corner -- no inflation! -- when it comes to using its unconventional toolkit.

Self-induced paralysis is a lot of work with no pay off.