Wednesday at 2: 15 pm, Ben Bernanke is going to do something that FED previous Presidents considered to be a very bad idea. It will hold a press conference.
Mr. Bernanke has spent much of his academic career, arguing that the Fed should be less opaque and, as President, he put his ideas into action. It is now time for those of us in the media to support our end of the market. In the spirit of democratic accountability, we must ask difficult questions - and we should not let him get away with hiding and half-answers that the members of Congress are too often fed Presidents in their appearances on Capitol Hill.
More than any other that the other is shouting for an answer only one question: why has Mr. Bernanke decided to accept the generalized unemployment for many years, even if he thinks he has the power to reduce it?
The Fed forecasts suggest that the unemployment rate fall below 5% for perhaps another five or six years. Mr. Bernanke believes that the Fed "retains considerable power" for faster unemployment, despite the fact that its benchmark interest rate is zero, as discussed previously. However, it has been reluctant to use this power.
It is difficult to be fair somewhere. Several other voting members of the Fed's monetary policy Committee - and some prominent members of Congress - oppose aggressive action, because they fear it will set off inflation. But these critics still worry about inflation. They were wrong again and again over the past two years. More important still, they are not enough power to prevent Mr. Bernanke to continue the policy that he considers is better.
If the decision by the Fed to allow unemployment high for an extended period is based on his shoulders.
As he explained several times, the Fed has alternatives. He could announce that he would retain his rate of reference zero for a few years, which would probably keep long-term rates. One could say that he was comfortable with higher inflation for a limited period, seen how low inflation since 2007 and how the high unemployment rate is. Above all, Mr. Bernanke could clear it considers the years of widespread unemployment unacceptable.
He does the did not, and it has yet to offer a satisfactory explanation.
Instead, he said that more aggressive action brings risks. And he does. Low interest rates are likely to trigger inflation, seduce millions of homes and businesses to borrow money and causing the economy to overheat. Rising inflation could, among other things, increase the rate of borrowing for the Government of the United States and the mounting deficit.
But keep in mind that only about each decision entails certain risks. Simply stating that a more aggressive action brings risks is not a good argument against this option.
Sometimes, as economists describe choices in terms of a concept called value expected. The expected decision value is the relative risk of each possible result multiplied by the benefit (or cost) of this result. If you are an investment that has a 90 percent of breaking even and a chance to 10 percent of win you $5,000, the expected value is $ 500.
Now extend this concept to the Fed's decision. The consequences of being too aggressive and creating an inflationary spiral are undoubtedly serious. But the odds appear still fairly low. Put the two together and you get a cost, which is not high enough to be dictating the policy of the Fed.
One of the best guides to future inflation is recent core inflation - that is, inflation, excluding food and energy prices, which bounce around a lot and often do translate not in big changes in other prices. Despite the rise in core inflation, it has even increased at an annual rate of only 2% in the last three months. Only a few other times in the last 40 years has been so low.
This should not be surprising. After all, the economy is felt as if he is about to overheat?
The cost expected the rate of unemployment, on the other hand, is stiff. On the one hand, the chances that unemployment will remain a problem are close to 100%. The debate is whether the country will be back to full employment in four years or ten years.
On the other hand, the consequences of high unemployment are also terrible. With fewer jobs, States and cities are tax revenues. Families lose their savings. The health of the people may deteriorate. For the long-term unemployed, the financial damage can be permanent. "If things go and they just sit at home or work very irregular," Mr. Bernanke himself said last year, "when the economy gets back to a more normal state, they will be able to find the good work."
Unemployment creates political problems, too. Historically, it has tended to make people less willing to help their fellow citizens, as Economist Benjamin Friedman wrote. It is difficult to imagine a grand political compromise - on the deficit, for example - in a country in anger.
Mr. Bernanke is an admirable public official in many respects. He was quietly heroic during the worst days of the financial crisis. In making the more open Fed, he took the rare step for a politician: voluntarily giving a portion of his power.
Nevertheless, his performance on the job last year was distorted. The Fed has badly overestimated the strength of the economy in 2010 and took too much time to correct his error. Despite his fundamental belief in letting the facts guide decisions, Mr. Bernanke has let himself be influenced mainly by a group of colleagues who see inflation always and everywhere in the world as a threat and unemployment as a mere nuisance.
The Wednesday Press Conference offers a chance to ask accounts. The country Fed - a scholar leader Ben Bernanke, formerly of Princeton - expect nothing less.
E-mail: leonhardt@nytimes.com. Twitter.com/DLeonhardt
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