In testimony to Congress on Thursday, Federal Reserve Chairman Ben S. Bernanke was careful not to commit himself to further monetary stimulus. We’re thinking about it, he said, presenting a minutely evenhanded review of the arguments for and against.
The Fed ought to get off the fence. At the next meeting of its policy-making committee on June 19-20, Bernanke and his colleagues should decide on a new program of monetary easing.
Things are rarely certain in central banking, but we think the case is stacked pretty strongly in favor of more quantitative easing — the Fed’s unorthodox (and controversial) method for driving long-term interest rates lower by buying government debt. According to the Fed’s analysis, the economy is now growing too slowly to make significant inroads onunemployment. Jobs figures released last week were especially disappointing, suggesting another pause in what was already a painfully slow recovery. Revised figures marked down first- quarter growth in output.
What about inflation? It’s falling. Lower energy prices are helping. Long-term inflation expectations matter more — they’re low and stable, and “the substantial resource slack in U.S. labor and product markets should continue to restrain inflationary pressures,” Bernanke said.
It’s crucial to note that risks in the outlook are tilted to the downside. Europe’s economic difficulties threaten to run out of control at any moment. U.S. fiscal policy is another danger. If the economy falls over the so-called fiscal cliff at year’s end, count on a second recession. If Congress heads that off, fiscal policy is likely to subtract demand from the economy next year. If Congress doesn’t head it off, that wouldn’t prevent the Fed from doing yet another round of QE.