Section 2a. Monetary Policy Objectives
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
[12 USC 225a. As added by act of November 16, 1977 (91 Stat. 1387) and amended by acts of October 27, 1978 (92 Stat. 1897); Aug. 23, 1988 (102 Stat. 1375); and Dec. 27, 2000 (114 Stat. 3028).]
In black and white, that's the mandate carried by the Chairman of the United States Federal Reserve, Ben Bernanke. He, and others, may not like it, but until the law is changed, it is what it is.
And that's what makes this exchange so remarkable:
Brad Delong: Why haven't you adopted a 3% per year inflation target?
Ben Bernanke: The public's understanding of the Federal Reserve's commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank's willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve's policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.
I can't imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.
Personally, I think that Mr Bernanke owes us all a better explanation of why he has opted to place so much more emphasis on the price stability aspect of his mission than the full employment aspect. And, there should be a policy debate on this question, the resolution of which should inform the choice to reappoint (or not) Mr Bernanke.
Bernanke faces a defacto confirmation vote on Thursday. The Senate will vote on cloture to see if Bernanke's supporters can reach the 60 vote threshold required to send his nomination to the floor for an up or down vote.
Over the last several days, I've been asking Democratic and Republican Senators if they support his nomination and whether or not they think he's done enough to combat unemployment. Given that the narrow unemployment measure stands at above 10%, and the wider measure of unemployment that counts those working in part-time positions (or jobs for which they are drastically overqualified) stands at nearly 20%, the answers I received shocked me.
By far the worst answers came from Saxby Chambliss and Tom Coburn. Watch below and see Coburn tell me that addressing unemployment isn't Bernanke's job:
And here is audio of Chambliss telling me that Bernanke's priority is stabilizing the financial markets:
Question: Do you think he's doing enough to combat unemployment? I mean, he's got a dual mandate: to control inflation and unemployment. Unemployment's at 10%.
Chambliss: His focus is the financial world and can't be truly on the issue of unemployment. That's more of a policy issue for the White House to be focused on, rather than him. You know, if the financial community gets stronger then unemployments going to benefit.
In addition to Chambliss and Coburn, I spoke with several Democratic Senators. Senator Levin, from Michigan where unemployment has hit especially hard, told me that he's focused on other areas of the Fed Chair's domain, specifically Bernanke's future role in regulatory matters. When asked specifically if he is concerned that Bernanke isn't focusing enough on maintaining maximum employment, the Senator responded, "That's not been one of the questions I've focused on. I've focused on other issues."
Watch:
I also spoke with Senator Begich on his way to cast a vote. When asked about unemployment, the Senator said he hadn't seen the Chairman's statement regarding prioritizing price control over unemployment and went on to say that he "hope[s] he will be open to new ideas."
Senator Gillibrand, up for re-election and facing a primary threat from Wall Street friend, Harold Ford, had this to say when asked if the Feds prioritization of inflation control over maintaining maximum employment was proper:
Gillibrand: Well obviously those are the two competing factors and as the Fed Chairman, he's concerned both about inflation, but he's also concerned about overarching monetary policy and how that affects the economy. My biggest concern right now is unemployment. Jobs creation is my number one agenda item. So those are issues I want to talk about because, as the Fed Chairman, I want to know what his views are on the various regulatory reforms that have come out of the administration because I'm looking for reforms that are going to truly reduce risk in the system and create a stronger financial services industry so that we can continue to create jobs and most importantly, create lending, particularly in the small business market...
The entire audio is worth a listen (she goes on to say that she supports an audit of the Fed, amongst other things):
I also spoke with New Hampshire Democratic Senator Shaheen who is also undecided with regards to voting to confirm Bernanke. I told her about the Delong/Bernanke exchange and asked her if Bernanke's choice to accept higher levels of unemployment was acceptable to her. She told me, "Well, I don't think higher levels of unemployment are acceptable under any circumstances in this country and that's what... I've been working very hard, to address."
Watch:
In addition to the conversations I had with those presented here, I spoke with at least a dozen others, both supporters and opponents. In the end, the impression I was left with is that we aren't well-served by the confirmation process. The Fed is an impersonal and opaque institution. We all know it is there, but not very many people understand its role in our economy. Senators are no exception to the general rule. These folks have been immersed in health care for months and months; the confirmation of Chairman Bernanke as a serious question never really entered their field of vision until just recently. Now that it has, it's too late to do the oversight and inquiry that the American public deserve and need.
Bernanke's cloture vote will take place tomorrow, the day after the State of the Union. We may hear a 10 second news blip about him clearing a "key procedural hurdle," and then the gas-bags will go back to analyzing the President's body language and the First Lady's taste in fashion. Thirty hours after cloture is invoked, sometime on Saturday afternoon, Bernanke will be confirmed. Bloggers will see the wire report and post a recommended diary or two that will scroll into the ether before America wakes up for work on Monday.
And on Monday, Ben Bernanke will continue studiously ignoring the increasing unemployment rate while ensuring the Wall Street "Masters of the Universe" remain insulated from their disastrous decision-making.