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It Isn't Easy to Decide Whether to Ease

12:00 AM, Aug 25, 2012 • By IRWIN M. STELZER
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Federal Reserve Board chairman Ben Bernanke now has two reasons to disappoint those who are hoping he will use his speech next week at the conclave of central bankers in Jackson Hole, Wyoming, to launch the good ship QE3. The first is that the economy continues to move ahead, albeit at a slower rate than is needed to bring the unemployment rate down significantly. Retail sales have been reasonably good; share prices, with the notable exception of Facebook, are matching (well, almost) the dreams of avarice of those traders operating in this low-volume, summer market; and the economy is growing, perhaps at an annual rate in excess of 2 percent.


The much watched housing sector also seems on a steady path to recovery. Sales of existing homes rose by 2.3 percent in July from June, and by 10.4 percent from last year. The average price of previously owned homes, $187,300, is now 9.4 percent higher than last year, the biggest jump since January 2006. Better still, the supply overhang of existing homes is at its lowest level relative to sales since February 2006.       

Sales of newly built homes also picked up in July, by 3.6 percent, and applications for building permits rose 6.8 percent, to their highest level in four years, reflecting rising homebuilder confidence. Toll Brothers, which caters to buyers with annual incomes in excess of $100,000 and who can put up a 30 percent percent down payment (equity), is “enjoying the most sustained demand we’ve experienced in over five years,” according to CEO Douglas Yearley. Deliveries of newly built Toll Brothers homes rose 39 percent in the current quarter, with prices averaging $576,000. “It feels good to be making money again,” Martin Connor, Toll’s chief financial officer told analysts in a conference call. Indeed.

There are some signs that the recovery of the housing sector is being translated into jobs: the areas that suffered most in the housing bust are seeing a relatively rapid decline in their unemployment rates. Goldman Sachs’s numbers crunchers report that nonfarm payrolls grew over 2 percent in the past year in “the housing bust states,” but only 1.2 percent in the rest of the country.

The second reason that Bernanke might decide to stay his hand is what might be a signal that he should not plan to return to Princeton University when his term expires on January 31, 2014. Mitt Romney’s chief economic adviser, Glenn Hubbard, dean of the business school at Columbia University, told an interviewer, “Ben is a model technocrat … [who should] get every consideration” to stay on for another term. Of course, such “consideration” would be more likely if Bernanke left QE3 in dry dock since, according to the Romney team (assuming there is a position that can be so attributed), another round of easing would have little effect on interest rates or economic growth, and might prove inflationary. “I don’t think that’s [QE3] what the doctor ordered for the recovery,” said Hubbard.

It doesn’t take a Ph.D. to connect the dots—another term might be yours if you resist pressure for another round of quantitative easing. Of course, Bernanke might want to let that cup pass. On the one hand, he must be tired of being a piñata for snarly congressmen who confront him with hostile statements their staffs reckon will garner a bit of television coverage. On the other, the role of powerless academic scribbler, even supplemented with lucrative consultancies, can’t be much to look forward to after being fawned on by the press, praised and scorned—but never ignored—by congressmen, and respectfully consulted by the world’s central bankers posing problems so difficult that, to quote Tevye, the milkman in Fiddler on the Roof, they “would cross a Rabbi’s eyes.”

With Romney telling Fox News that he prefers a new man at the Fed, all of this might be just the sort of diverting nonsense in which Washington gossips specialize. Then again, Romney has not been famous for consistency, and a case can be made that continuity at the Fed would provide a bit of certainty in a highly uncertain world.       

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