Political India: Engaging America

Federal Reserve Chairman Ben Bernanke knows when to respond to market expectations — and when not to. Although speculations were rife this week that he might announce a further round of quantitative easing in a major speech on Friday, Mr. Bernanke disappointed observers did not outline any new expansionary monetary policy measures that the Fed might adopt.

The sober speech at an annual economic conference in Jackson Hole, Wyoming, reflected his cautious optimism on economic growth in the United States, which, Mr. Bernanke however warned, “has been much less robust than we had hoped.” He also expressed concern on the question of stubbornly high unemployment levels, noting that the “extraordinarily high level of long-term unemployment,” had led to a situation where nearly half of the unemployed had been out of work for more than six months.

‘Unusual circumstances'

While Mr. Bernanake noted that such “unusual circumstances” warranted policies that promoted a stronger recovery in the near-term, he shied away from announcing any unconventional policies such as an additional large-scale bond purchase.

Instead the Chairman focused on an area of economic policy that is beyond the Fed itself — fiscal policy — and spoke with surprising candour about the recent debt ceiling battle in the U.S. Congress and the White House. Implicitly criticising lawmakers for allowing a crisis to foment around the debt limit negotiations, which ultimately led to a downgrade of the U.S.' credit rating by S&P earlier this month Mr. Bernanke said, “There seems little doubt that [these developments] have hurt household and business confidence and that they pose ongoing risks to growth.” Mr. Bernanke also sought to underscore the link between the urgent need for fiscal reform and the imperative to steer the U.S. economy back to a high-growth path. Pointing out that the issue of fiscal sustainability had to be quickly addressed he cautioned that fiscal policymakers “should not, as a consequence, disregard the fragility of the current economic recovery.”

Instead, he said, they ought to promote stronger economic performance through the design of tax policies and spending programs, a hint that the Fed preferred to see balanced approach of tax hikes as well as spending cuts in getting the U.S back to fiscal health.