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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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Whatever his future, Bernanke must live in the here and now, and with the fact that many members of his monetary policy committee can no longer be counted on to back him should he decide against further easing. Recently released minutes of the July 31-August 1 meeting of the committee include this widely noted tidbit, “Many [how many?] members judged that additional monetary accommodation would likely be warranted fairly soon [when?] unless incoming information [which data?] pointed to a substantial and sustainable strengthening in the pace of the economic recovery." Of course, a “substantial and sustainable strengthening” of the recovery is in the eye of the beholder. The fog of Fed speak remains impenetrable. 

Much will depend on the next jobs report, due on September 7, a week after Bernanke’s speech at Jackson Hole, timing that gives the chairman both an incentive and a reason to stall. If the jobs market remains weak, with job creation substantially less than 100,000 in August, Bernanke is likely to find some method of easing further next month, although how such a move can accelerate growth is unclear.

It can’t much lower interest rates; besides, the barrier to a faster housing recovery is not mortgage rates, which are low, but lending standards, which are tight. It can’t reduce the drag from the eurozone’s problems or China’s slowdown. It probably can’t even do much to boost asset prices: “Given the strength of the summer rally in equity and commodity prices, QE3 may already be priced in,” say economists at Capital Economics. Nor can it slow the dash to the fiscal cliff—only a deal between Republicans who oppose any tax increases and Democrats who oppose any cuts in social spending can do that, and neither has indicated willingness to compromise.

A new report by the Congressional Budget Office estimates that failure to prevent the expiration of the Bush tax cuts and activation of mandated spending cuts would drive the unemployment rate from its current 8.3 percent to 9.1 percent by the end of next year. Extension of the status quo would postpone that plunge into recession, but the resultant deficits would drive debt held by the public to 90 percent of GDP, a level most economists say would usher in an extended period of subpar growth.

If the Fed does ease, billionaire John Paulson and his investors will be among the winners. Paulson, who anticipated the mortgage bust, has been stocking up on gold—so, too, George Soros and bond giant PIMCO—and is benefiting from the recent almost 5 percent uptick in gold prices in response to turmoil in Europe and fear that more easing in the U.S. and elsewhere will trigger inflation. House prices and rents are rising, petrol prices are again spiking, the drought is driving food prices up by 5-10 percent, and health care costs continue to rise. A sprinkling of Fed easing on these smoldering embers might, only might, lead to a good old-fashioned inflationary conflagration.   

Come to think of it, Princeton might be an attractive haven at which Professor Bernanke could launch, not a new QE, but a leisurely addition to his substantial scholarly oeuvre. 

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