Anyone expecting any dramatic new revelations or departures from
Fed Chairman Ben Bernanke’s annual speech to the New York Economic Club
would have been disappointed. He essentially repeated his
dissatisfaction with the pace of economic growth and job creation and
pledged the Fed’s efforts to improve it.

Echoing what the Federal Open Market Committee said at its last
two meetings, Bernanke said the Fed’s policymaking body plans to keep
monetary policy “highly accommodative … for a considerable time after
the economic recovery strengthens.” He said “we will want to be sure
that the recovery is established before we begin to normalize policy.”

Bernanke also reiterated the Fed’s intention to keep buying $40
billion of mortgage backed securities per month until the labor market
improves “substantially” in its third round of “quantitative easing.”

Bernanke did not say, nor was he asked, what the FOMC should do
about the $45 billion of Treasury bond purchases under “Operation Twist”
due to expire Dec. 31. But he left the door open to a full or partial
replacement of those purchases through an expansion of QE3. The FOMC
“indicated that we would continue purchasing MBS, undertake additional
purchases of longer-term securities, and employ our other policy tools
until we judge that the outlook for the labor market has improved
substantially in a context of price stability,” he recalled.

Former Fed Vice Chairman Alan Blinder asked why the Fed doesn’t cut
the interest rate on excess reserves from 25 basis points. Bernanke
responded that the Fed “has considered” and “continue(s) to consider”
doing so. But, as he has in the past, the Fed chief said the Fed’s
best judgment is that the stimulative effect — 8 or 9 basis points
— would likely be outweighed by the potential costs to money market
liquidity and so forth.

Bernanke spent much of his time warning again about the
“substantial threat” of allowing the economy to go over the “fiscal
cliff” of automatic tax hikes and spending cuts. This, along with
European financial strains and continued housing problems, is causing
business uncertainty that delays hiring and investment decisions, he
said. Those uncertainties “will only be increased by discord and delay,”
he said, adding that “cooperation and creativity to deliver fiscal
clarity.”

Earlier, Richmond Federal Reserve Bank President Jeffrey Lacker,
who will likely dissent yet again at the Dec. 11-12 FOMC meeting,
repeated his opposition to MBS purchases, calling it a form of “credit
allocation” in violation of the March 2009 Fed-Treasury accord. He
questioned the efficacy of quantitative easing generally and also blasted
the FOMC’s “forward guidance” on the path of the federal funds rate.

Trying to stimulate the economy by promising to keep rates lower
longer is unlikely to work without increasing inflation expectations,
and trying to increase inflation and inflation expectations temporarily
risks undermining Fed credibility, Lacker argued.

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