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Irwin Kellner Archives | Email alerts
Nov. 8, 2011, 12:01 a.m. EST
By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) "â? One of the Federal Reserve's dual mandates should be dropped.
Last week, at his press conference following the release of the minutes of the latest meeting of the Federal Open Market Committee, Fed chair Ben Bernanke spent a lot of time apologizing for failing to get the unemployment rate down.
He need not have done so. Pushing the unemployment rate down not only conflicts with the central bank's main objective of keeping inflation low, it is also something that the money mavens can do little to influence.
It's like trying to push on a string.
When it was created nearly 100 years ago, the Fed was given one mission: create enough liquidity to take care of the needs of the economy "â? but not so much as to cause inflation.
As simple as this seems, it was not all that easy. Sometimes the Fed created too much money, sometimes not enough. Consequently, the central bank had to endure lots of criticism for creating booms and busts over the years because it was unable to create money at a steady pace.
Still, there was little doubt that the Fed could influence the rate of price increases. If inflation heated up, the Fed would slow money growth and push interest rates higher. Once inflation abated, the Fed would boost money growth and let interest rates fall.
While the Fed did concern itself with the pace of economic growth "â? and thus, unemployment "â? it did so with an eye toward achieving its objectives for inflation. Faster growth would push unemployment lower, while slower growth would do the opposite.
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But understand that unemployment was a by-product of the Fed's main objective, which was to keep inflation as low as possible without precipitating a recession. This was the way the Fed operated for the first 65 years of its existence; it did not have to worry about keeping unemployment low until 1978, when Congress added this to the Fed's mission.
This was easier said than done, especially since low unemployment was usually accompanied by high rates of inflation. Besides, unemployment can't be influenced by monetary policy, at least not as directly as the price level.
That said, I can only surmise that the pols gave the Fed this dual mandate to absolve themselves of responsibility for keeping growth high and unemployment low. This is ironic, since fiscal policy is far more effective than monetary policy when it comes to stimulating the economy.
The central bank's tools are limited. It can cut interest rates, boost the money supply and change reserve (and margin) requirements. However, it can't force people to borrow or to buy stocks, and low interest rates can actually hurt the economy by depriving savers of interest income.
Today is a good example. Low rates and lots of liquidity have done little to prop up economic growth and thus reduce joblessness. Businesses don't want to borrow, the banks are reluctant to lend, and consumers are trying to reduce their debts and increase their savings.
As Mr. Bernanke told the press: "It would be helpful if we could get assistance from other parts of the government to help create more jobs."? Translation: Fiscal policy is needed to boost growth and lower the unemployment rate.
The government should spend more and tax less. It should not worry about the deficit, that's for another day.
The blame for not boosting growth enough to cut joblessness rests with the Congress and the White House. They should recognize that this is their responsibility, not the Fed's.
Irwin Kellner is MarketWatch's chief economist.
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Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for... Expand
Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for more than 40 years and previously served as chief economist for North Fork Bank, Chase, Chemical and Manufacturers Hanover. Widely quoted by the media in the U.S. and abroad, Kellner regularly addresses groups of business people and community leaders and appears regularly on Cablevision's News 12 Long Island. Collapse
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