Wednesday 17 January 2018

Bernanke fails to deliver

Anyone hoping for the monetary equivalent of "shock and awe" from Fed chairman Ben Bernanke's address at the Jackson Hole economics conference was sorely disappointed.

While Bernanke stated that it was crucial for the health of the US economy to reduce unemployment, the Fed chairman stopped short of unveiling another bout of "quantitative easing", aka printing money.

In truth he probably had no choice. With Republican Party presidential front-runner Rick Perry having effectively accused Bernanke of treason for sanctioning previous episodes of monetary easing, the Fed chairman's room for manoeuvre has been drastically reduced. Congressional Republicans have already demonstrated their willingness to play politics with America's credit-worthiness.

This presents Bernanke with an awkward dilemma. The position of Fed chairman is a supposedly non-partisan one. While Bernanke's own instincts almost definitely favour further quantitative easing, he is the recognised academic expert on the monetary policy followed by his Fed predecessors in the early Thirties. The Republican Party stance means that, if he does so, he will be accused of favouring the Democrats in next year's presidential election.

All of which means that, while US interest rates will remain low for at least the next two years, America will start to cut spending in 2012, tightening fiscal policy at the very time when a further loosening is required to stimulate economic recovery.

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