Last Tuesday, Fed Chairman Bernanke gave a speech at an international monetary conference in Atlanta. Financial markets reacted negatively. But most of the speech simply quoted statistics that are already well-known to anyone who follows such matters. In short, the economic recovery is not strong, jobs growth is weak, consumer confidence is not strong, and commodity and food price inflation is negatively affecting households. There was not a lot of good news in the speech, but that is simply a reporting of what all of us who follow economic news know is actually happening.
The real importance of the speech was what was NOT said. The Fed Chairman did not spell out new or even continued plans for aggressive growth of the money supply. He did say that Fed-controlled interest rates would remain low. Perhaps the Fed chairman realizes that the Fed has already done as much as possible to stimulate the economy. Indeed, many say that the Fed has already done too much. For example, here is an article that looks at money supply statistics from the Fed, and warns about inflation that the Fed has not acknowledged.
The most important part of the entire speech was a limited reference to what Congress and the President need to do. Specifically:
If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. … Our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.”
Bernanke’s warning is not new, but has so far been largely lost on those in a position to fix this problem.