An appeal to the Fed - take aggressive action to help recovery

At NYTs, Former Council of Economic Advisors Chair Christina Romer:

THE next meeting of Federal Reserve policy makers, on June 19 and 20, will probably be contentious. The latest employment report, showing anemic job growth for a third consecutive month and an uptick in unemployment, will surely make some Fed members want to take additional expansionary action. Others, however, appear steadfastly opposed.

The argument for additional monetary action is straightforward. By law, the Fed is supposed to aim for maximum employment and stable prices. But the unemployment rate is 8.2 percent — a good two percentage points above what even the most pessimistic members say is its sustainable level. Moreover, the spate of disappointing data and the deepening crisis in Europe make continued weakness all too likely...

Some Fed members contend that monetary policy has already done its share. Other policy makers, they say, need to step up. Both the Fed’s chairman and its vice chairwoman have talked about the need for additional near-term fiscal stimulus as part of a gradual deficit-reduction plan. And many Fed committee members have called for a more aggressive housing policy. Indeed, the Fed raised some hackles in January when it sent an unbidden white paper to Congress, outlining possible administrative and legislative initiatives to deal with problems like foreclosures and underwater homeowners. 

I agree that we need more effective fiscal and housing policies. But neither is likely to happen, at least not before the presidential election. As a result, the Fed is the only plausible source of immediate help for the American economy. It was set up as an independent body precisely so that somebody can do what’s right when politicians can’t or won’t. 

I find a related argument even more frustrating: that the Fed shouldn’t act because Congress wouldn’t like it and might retaliate. This argument exposes the important truth that the Fed is only as independent as Congress lets it be. 

But it also raises a key question: what are Fed policy makers saving their independence for? If rescuing millions of Americans from the torment of unemployment isn’t a reason to risk their independence, what is? 

In 1958, when the Fed was taking an unpopular stand to fight inflation, a very wise Fed chairman, William McChesney Martin, said this: “If the System should lose its independence in the process of fighting for sound money, that would indeed be a great feather in its cap and ultimately its success would be great.” The current Fed chairman, Ben S. Bernanke, should add the phrase “and full employment” after “sound money,” and paste that line on his bathroom mirror. 

MANY Fed officials contend that additional action might push up inflation. But right now, the inflation measure that the Fed watches is a bit below its target of 2 percent, so that isn’t an immediate issue...

With continuing high unemployment at home and slowing growth abroad, inflation seems more likely to fall than to rise. And there’s no evidence that a modest relaxation of the Fed’s vigilance could cause inflation to jump suddenly. Inflation is likely to rise only if the economy takes off — an outcome to pray for, not fear. 

More fundamentally, the Fed’s dual mandate doesn’t say it should care about unemployment only so long as inflation is at or below the target. It’s supposed to care about both equally. If inflation is at the target and unemployment is way above, it’s sensible to risk a little inflation to bring down unemployment...