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Bernanke Press Conference: No Additional Easing

In his press conference today following the Fed's Open Market Committee meeting, Fed Chairman Ben Bernanke all but ruled out the possibility of a third round of quantitative easing. In response to a question about whether the Fed is considering further easing, Bernanke noted that this is a committee decision, it's not his to make alone, but he gave two main reasons why the Fed is reluctant to pursue additional asset purchases.

First, when the Fed decided to put QE2 in place, there were substantial worries about deflation. Thus, the Fed was missing both elements of its dual mandate by a wide margin, and further easing would help to increase inflation and stimulate output. Now, however, although the output gap is still large, the Fed is starting to see signs of inflation. Bernanke stated that most people underestimate the negative impact inflation can have on growth and employment, and this indicates the Fed will not be willing to increase the risks that inflation will become a problem.

The other reason he gave for being wary of further easing is that the Fed is starting to see increases in wages. Thus, the Fed is worried about an emerging wage-price spiral, and it is determined to stop this from happening. A wage-price spiral was a big problem in the 1970s and the beginning of the 1980s, and memories of this episode make the Fed unlikely to do anything that might cause it to happen again.

In the past, Bernanke has also stated that the Fed is in unfamiliar territory with the inflated balance sheet from QE1 and QE2, and that creates a lot of uncertainty about how much inflation risk the Fed has created. This also works against further easing.

Finally, in his presentation of the Committee's forecasts of where the economy is headed, Bernanke noted that most committee members expect relatively strong output growth next year, and that is another reason why the committee is thinking more about when to begin tightening than it is about further easing.

There were many questions about when the Fed might begin tightening, but Bernanke was very careful not to tip his hand. He said it will depend on how the recovery progresses, but as noted above, most committee members expect relatively strong growth next year.

If the economy weakens considerably, anything is possible, but there's no indication at this time that the Fed has any inclination toward further easing.

I think it's a mistake for the Fed to look past the current slowdown in the recovery (it should ask itself how often it has had to downgrade its forecasts in the past). This is a critical point in the recovery, and if the Fed makes the wrong choice, it could make things worse than they need to be. I didn't expect to hear news of further easing at this meeting, but I did hope to hear a bit more willingness to consider it.