The Wall Street Journal
By: Sudeep Reddy
December 2, 2010
Top Federal Reserve officials are pressing lawmakers to pair a long-term plan for deficit reduction with new short-term fiscal stimulus to boost an economy that the central bank admits needs more help than it can provide.
Fed Chairman Ben Bernanke has tucked support for a two-part fiscal strategy into speeches, and has pushed it behind the scenes with lawmakers, offering a boost both to deficit hawks and to proponents of spending more or taxing less in the near term.
Fed Vice Chairman Janet Yellen, in a speech on Wednesday, amplified Mr. Bernanke's call. "We need, and I believe there is scope for, an approach to fiscal policy that puts in place a well-timed and credible plan to bring deficits down to sustainable levels over the medium and long terms while also addressing the economy's short-term needs." Ms. Yellen didn't elaborate on the latter.
Even if the central bank's controversial bond-buying initiative works as its proponents hope, Fed officials acknowledge it will only do a little to boost growth and bring down unemployment. Internal Fed estimates say it could reduce unemployment by three-tenths of a percentage point. With short-term interest rates at zero, several Fed officials see fiscal policy as the best way to spur economic growth.
But despite projections that unemployment will remain high, some Fed officials, like many Republican lawmakers, dispute the idea that a short-term stimulus is necessary, or wise, for today's economy. And though the plan unveiled Wednesday by the co-chairmen of the president's deficit commission contemplates a payroll-tax holiday to spur hiring, few analysts expect Congress to enact more stimulus.
Mr. Bernanke and Ms. Yellen are treading cautiously, as commenting on fiscal policy carries political risks, and invites members of Congress to involve themselves in monetary policy. Some conservative lawmakers, who believe the Fed's bond-buying program risks sparking high inflation, have already attacked the Fed and talked of reopening the law that governs it.
Complicating Mr. Bernanke's pitch is that the committee he oversees is divided, as lawmakers are, on what the economy needs most. "This is a very politically contentious issue," said former Fed governor Laurence Meyer, now at Macroeconomic Advisers, a consultancy. "He doesn't want to be so strong on deficit reduction that he swings in favor of the Republicans and potentially lessens support for short-run fiscal stimulus."
In public, Mr. Bernanke has called for a fiscal program "that combines near-term measures to enhance growth with strong, confidence-inducing steps" to reduce the deficit. "There are limits to what can be achieved by the central bank alone," he said in a speech last month.
In meetings with lawmakers, he has avoided specifics so as not to step on political terrain, leaving his views open to interpretation.
"He's never defined what short-term stimulus is to me," said Sen. Bob Corker (R., Tenn.), who met with Mr. Bernanke last month. "I'm going to take that to mean keeping our tax rates where they are for at least a couple of years while we wrestle with the tremendous spending issues."
Sen. Jack Reed (D., R.I.) said Mr. Bernanke was making "a legitimate point and a wise point" in his case for short-term stimulus. "Monetary policy alone has an effect, but it has to be complemented by fiscal policy," he said.
Former Fed Chairman Alan Greenspan drew criticism for his forays into fiscal policy, both for endorsing President George W. Bush's 2001 tax cuts--though he notes that lawmakers ignored his pleas to include triggers to cancel them if deficits reemerged--and for lending his support to President Bill Clinton's tax-heavy deficit-reduction program in the early 1990s.
Top central bankers in Europe and the U.K. occasionally weigh in on fiscal policy, and occasionally draw criticism for doing so.
Mervyn King, the head of the Bank of England, has drawn fire recently from another member of the bank's policy committee, Adam Posen, who described Mr. King's support for the new government's austerity program as "excessively political."
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