Bernstein: Fed May Be Making Same Mistake as Congress Has

Tuesday, 25 Jun 2013 07:48 AM

By Michael Kling

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By moving away from its stimulus effort, the Federal Reserve may be making the same mistake as Congress is, warns Jared Bernstein, a former Obama administration economist.

"I get that they're planning their pivot, which isn't the same as pivoting. But they're doing so too soon," Bernstein writes in his On the Economy Blog.

Stocks tumbled last week after Federal Reserve Chairman Ben Bernanke's press conference on the Fed's plans for decreasing its quantitative easing (QE) bond purchases.

Editor's Note:
Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

And stocks will probably remain volatile. But Bernstein, a senior fellow at the Center on Budget and Policy Priorities, says he's more worried about the real economy.

"And I used to have a friend in Ben when it came to that. Now, I'm not so sure," he notes.

"Years ago, Congress and the administration pivoted too soon from the jobs deficit to the budget deficit."

That left only the Fed in the fight to energize the economy and attack unemployment.

Bernanke said the Fed could begin reducing its bond purchases later this year if the economy improves as it expects, and could end it completely in the middle of next year.

It forecasts gross domestic product to grow 2.3 percent and 2.6 percent this year, better than last year's 2.2 percent growth.

Yet most forecasts say growth will be slower, not faster, this year, Bernstein asserts. The Fed's forecasts have been consistently too optimistic, prompting the Fed to repeatedly revise its figures downward.

Loose monetary policy always has costs and benefits, he acknowledges. For instance, savers see less interest income. The risk of asset bubbles increases when risk is underpriced.

"But as long as the broader economy remains in the residual gravitational pull of the great recession, the benefits of the Fed's aggressive actions outweigh the costs."

Barclays Chief Economist Dean Maki said the Fed might begin winding down its QE program as soon as September due to a fast-improving economy, the International Business Times reported.

The Fed might completely halt QE by March 2014, while holding short-term interest rates low thorough March 2015, Maki told reporters.

"Despite the fact that we’re less positive on growth in the U.S, we do expect tapering from the feds in September,” said Maki. “Previously we did not expect the Fed to start tapering this year, based on our sluggish growth forecast."

The Fed is linking its decision to a 7 percent unemployment rate. That mark will be reached quickly if 100,000 new jobs a month are created, he said, noting that retiring baby boomers are pushing down labor force participation.

"We continue, as we have been throughout this recovery, to expect a faster decline in the unemployment rate than others believe, including the Fed,” Maki explained. "That is the key to ending QE, the speed of the unemployment rate decline."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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