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Bernanke Considers a Taper

12:00 AM, Jun 8, 2013 • By IRWIN M. STELZER
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·     Only 58.6 percent of the working-age population wakes up in the morning to head to work; in 2006 that figure was 63.4 percent. “By this measure, the labor market’s health has barely changed over the past three years,” notes Edward Lazear, a Stanford University professor and former chairman of President George W. Bush’s Council of Economic Advisers.

·     He does not yet know whether spending cuts and higher taxes, aka fiscal tightening, will have dire effects on the jobs market.

Recall that President Obama forecast that spending cuts—the so-called sequester—will eventually result in massive job losses. And congressional Republicans forecast that the tax increases on “the wealthy,” forced through by the President, will abort the still-fragile recovery. Bernanke is faced with some evidence that both the sequester and the tax increases are already slowing the economy, but can’t yet decide whether the full impact of this fiscal tightening has been felt in the economy and in the labor market. Most economists are predicting that the economy will not achieve in the current quarter the 2.4 percent growth recorded in the first quarter. So my guess is that the Fed chairman will keep bond purchases at or very near present levels, at least for a while. But that is not a uniform view: some Fed-watchers are predicting at least a slight reduction in purchases as early as September.

Let me conclude with some news that will produce rolling eyes in some readers, and smiles of optimism in others. The Wall Street Journal reports that academic economists and their students are newly interested in macroeconomic research, and are hunting for answers to several questions, among them “What’s going to happen when the Fed pulls back?” This open confession of the inadequacy of existing forecasting tools might be good for the souls of academic economists. Whether it will produce more reliable guides to the economic consequences of monetary policy is less certain.

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