Global Agenda: Yet more of the same

The money central banks have pumped into their economies has done precious little for production, employment and the real economy.

January 27, 2012 06:09
4 minute read.
Ben Bernanke

BenBernanke311. (photo credit: Associated Press)


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If the medicine proves ineffective, just try a bigger dose, for longer. That has been the essence of American monetary policy for the last several years, and it was firmly reiterated on Wednesday night. The latest meeting of the Federal Reserve Bank’s Federal Open Market Committee – the group of people who actually decide monetary policy – was noteworthy for the introduction of further elements of Chairman Ben Bernanke’s policy to increase openness and transparency.

One important element was the announcement of a defined target for inflation: namely, an annual rate of increase of 2 percent in the Fed’s preferred measure of consumer-price inflation. Another was the publication of the views of all the 17 members of the FOMC, including the nonvoting ones, as to when they think the first rise in interest rates will take place. The majority, 11, see this occurring in 2014 or later, while three think it will happen this year and three next year.

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However, these revelations are not very important. What matters is that in the accompanying statement the Fed announced it had extended its existing policy of holding its key interest rate at very close to zero from 2013 to 2014.

Why six members think that won’t be the case – i.e., that the Fed will choose, or be obliged, to change its policy this year or next – is an interesting side issue. The official policy remains “very low for even longer.”

Furthermore, in the press conference that followed the committee meeting – itself another innovation instituted by Bernanke last year, to “improve communications” and “enhance transparency” – the chairman was even more “dovish,” as the jargon terms it. He made it clear that the bias of policy remains firmly in the direction of further easing. Since rates are already almost zero, “further easing” means more “QE” (quantitative easing), which, in plain language, means that the central bank buys bonds in the open market, thereby pumping money into the economy.

There have already been several rounds of QE, since the height of the financial crisis in early 2009. These are referred to by analysts as “QE1,” “QE2” and “QE lite,” the last of which has been ongoing since last September.

There has been widespread anticipation of “QE3,” but this has, so far, not been forthcoming. However, Bernanke effectively promised to deliver it, if and when the economy does not improve further – especially in the key area of unemployment.


Against a background of massive additions of liquidity by the European Central Bank, the intention of the Bank of England to engage in a further round of QE in its bailiwick and the ongoing large-scale purchases by the Bank of Japan, it would be strange if the Fed remained aloof.

Or perhaps not. After all, a specific policy is pursued so as to achieve defined goals. There is considerable debate and a large measure of skepticism regarding whether the policy of quantitative easing has achieved its proclaimed goals of stimulating economic growth and promoting recovery, higher employment and expanded production.

It is very likely that QE1 prevented the meltdown of the global financial system in the 2008-09 crisis, but the impact of the subsequent efforts, in the US and elsewhere, has generated diminishing returns – if any. The money pumped in has tended to stay with the banks and not entered the wider economy. It may well have spurred financial speculation and driven commodity prices higher – and thereby contributed to inflation and, perhaps, to the surge in food prices that led to the Arab Spring. But it has done precious little for production, employment and the real economy.

What is certain is that the policy of very low interest rates for a very long period carries with it heavy costs. Many people, primarily pensioners, live from their investments (or their pension funds’ investments), and these have been hammered by the fact that safe investments generate virtually zero returns. To achieve a decent return on their money, they are obliged to move to investment vehicles that carry higher risks than they would like or that they should be exposed to.

Why, then, the determination to continue with and even intensify the current policy? There are several possible explanations. One is that Bernanke, the Fed and central banks as a whole, truly believe that this policy is necessary and effective, so that its costs are outweighed by its benefits. Another is that central banks and bankers are not convinced of the efficacy of QE, but they firmly believe that they must “do something,” and this kind of “unorthodox policy” is all that remains for them, after they used the traditional tools at their disposal.

If, however, even QE proves to be no longer capable of making a significant or lasting impact on the economy, or even the markets, then the central-banking emperors will be revealed as having no clothes.

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