Matt O'Brien:
Ben Bernanke's Secret Message to Congress: More Stimulus, Please: The Fed is already buying $85 billion of bonds a month on an open-ended basis and has promised not to raise rates before unemployment falls below 6.5 percent or inflation rises above 2.5 percent.
But it still thinks inflation will remain subdued, despite its bond-buying.
In other words, the Fed is telling us it will tolerate a bit more inflation, but it won't create it. That's as good an invitation as Congress is going to get to cut taxes or increase spending, at least until inflation is around 2.5 percent. Now, the Fed might buy fewer bonds than it otherwise would if Congress does more, but we know it won't raise rates--there's little guessing how much fiscal stimulus the Fed will allow. The multiplier is big now.
It's right out of Ben Bernanke's playbook. As Tim Duy, a professor at the University of Oregon, points out, Bernanke's often cited "helicopter drop" speech about how to stop deflation -- the idea was you could drop money from the sky as a last resort -- did not say a central bank could do this on its own. Bernanke said a "determined government" could "always generate higher spending and hence positive inflation," emphasis on the word government.
Bernanke wants Congress to help him, and he's doing everything he can to let them know.
