Does Ben Bernanke Have Any Ammo Left?
Federal Reserve Board Chairman Ben Bernanke speaks during a press conference following the Federal Open Market Committee meeting in Washington, D.C., June 20, 2012.
The Federal Reserve can’t seem to get any love these days. Within hours of the bank’s announcement that it would lower its growth and employment forecasts and continue its “Operation Twist” bond-buying program through the end of the year, the financial blogosphere was thick with criticism of Ben Bernanke and the central bank he heads.
Klein may have hit on Bernanke’s true thinking, but the “out of bullets” theory isn’t shared in all quarters. In fact, there is one tool, called “nominal GDP targeting,” that has been getting a lot of support lately from economists and journalist – from both sides of the political isle.
Basically nominal GDP targeting is a strategy whereby the Federal Reserve, instead of trying to keep inflation stable and unemployment low, would announce its intention of taking any action necessary to maintain a long run nominal GDP growth rate target. This would mean that instead of buying up a certain amount of bonds like the Fed has done with QEs 1 and 2, it would set a target for the effect of those bond purchases and then, in theory, buy up as many securities as necessary to make it happen.
This strategy has received the support of liberal economists and journalists like Christina Romer and Ryan Avent. This makes sense, considering NGDP targeting would involve a much more activist Fed.
Indeed, Ponnuru and Beckworth aren’t the only conservative proponents of this policy. The most vocal supporter of NGDP targeting, Scot Sumner, is also a conservative, and Mitt Romney economic advisor Greg Mankiw wrote a paper in the 1990s extolling the virtues of targeting nominal GDP.
Not everybody in on the right would be keen on this kind of regime, however. In the past couple of years some factions within the Republican Party, led by Ron Paul, have veered increasingly towards the Austrian school of economics, which is highly skeptical of central bank meddling in the economy and of governmental stimulus of any kind. This cycle’s Republican presidential primary was rife with tough words for Ben Bernanke’s unconventional policies, and Mitt Romney himself has opposed further quantitative easing from the Fed.
Of course, if Ben Bernanke and the rest of the Fed aren’t on board, it doesn’t matter what politicians think. And up to this point, Bernanke has resisted expanding the Fed’s balance sheet further – which would be the whole point, in the short run, to switching to NGDP targeting.
That said, if the situation in Europe bestows upon us another Lehman Moment, the Fed will probably scramble for more bullets. Conventional wisdom is that if the economy tanks again, Bernanke will resort to QE3, but perhaps a serious enough downturn will convince Bernanke that a “monetary regime change” is in order.