Federal Reserve Chairman Ben Bernanke presented his semi-annual monetary report to Congress this week. Bernanke was disciplined and on message. Unfortunately, the same cannot be said of Congress.
Members of both the House and Senate appeared ill-prepared and off-message, using their time to address the extraneous and irrelevant (to monetary policy). How, for instance, is the Fed chairman supposed to influence poverty and college loans with the federal funds rate?
Many congressmen and women have tried to beat up Bernanke over wages not rising fast enough relative to inflation (including food and energy). Not only do many members of Congress have their facts wrong (real non-supervisory wages have risen at two times the rate during this cycle than the first five-and-a-half years of the last), but they’re inconsistent since not one would want the chairman to hike the funds rate because of the elevated energy prices they decry.
In other words, congressional “leaders” berate the Fed chairman over high energy prices, lampoon him for a focus on core inflation, and then scold him for having raised rates too much! It’s a heady combination of hypocrisy, stupidity, and ignorance that’s otherwise known as Washington D.C.
In any event, for those who were actually listening, there were several important takeaways from the Bernanke testimony. The Fed slightly lowered its estimates for 2007 and 2008 growth, but kept its inflation forecasts unchanged. This necessarily implies that the Fed has lowered its estimate for productivity (potential), which is why the downward tweak to its growth estimates didn’t impact its outlook for inflation or the unemployment rate.
The Bernanke Fed is trying to be forward-looking by anchoring policy to a forecast and by using inflation expectations as a guide. Any change in the fed funds target rate from current levels likely will result from the Fed having to defend its forecast for growth and inflation. The forecast thus is the anchor for policy, while inflation expectations, derived from surveys and spreads in the bond market, are the bridge between current policy and the forecast.
The Fed minutes released yesterday suggest more balanced risks to growth, with business confidence, non-residential investment, exports, and a tight labor market likely to offset the ongoing adjustment in the residential sector. That fact that the economically sensitive Dow Jones Transportation Index has reached record highs into the teeth of $75-a-barrel crude oil prices sends a powerful message about growth.
With headline inflation elevated, commodity prices in the stratosphere, the dollar weak, and inflation-linked bond spreads above their 10-year moving average, there would seem to be upside risks to the Fed’s 2008 inflation forecasts, which may require higher short rates to achieve. However, this may be a 2008 event instead of a 2007 reality.
In the meantime, it would be helpful if the congressional leadership resisted lowering structural productivity to a rate below the Fed’s reduced forecasts by way of totally unnecessary and growth-retarding tax hikes on capital and labor.
Sadly, the U.S. shift toward economic populism and tax hikes, and away from free trade, is coming at a time when most of the rest of the world is moving down the Laffer curve by cutting tax rates and removing obstacles to commerce.
Perhaps it’s time for Congress to end the clown show and become acquainted with the basics of monetary policy and pro-growth economics. American competitiveness and prosperity depends on it.