06/22/2011 08:34 pm ET Updated Aug 22, 2011

Federal Reserve Keeps Power On Reserve For Another Day

NEW YORK -- Another major policymaker has decided to take a more detached stance toward the economic slowdown.

Federal Reserve Chairman Ben Bernanke's Wednesday media briefing resembled an economics lecture more than a press conference, as he dispassionately explained graphs that had been passed out to journalists, indicating slower economic growth than expected.

"I'm a little more sympathetic to central bankers than I was 10 years ago," he said in response to a question from a Japanese journalist about Bernanke's 2000 and 2002 analyses of Japan's lost decade, while he still was an economics professor at Princeton University. This seemed to betray a view of himself not as a central banker, but instead as an economics professor who left his secure perch at Princeton in order to serve his country. His stated sympathy for central bankers implies that he still is not a central banker at heart.

Continuing his professorial analysis of the economy, Bernanke said that although the Federal Reserve expects the unemployment rate to continue to decline, the rate of decline remains "frustratingly slow."

The apparent message: Like other observers, Bernanke is frustrated by the fact that unemployment still is 9.1 percent. But he does not believe the Federal Reserve has much power left to bring unemployment down without losing its long-term credibility and power.

And if the Fed were to lose its credibility as the central institution controlling the American economy's inflation rate, it could lose its power over economic conditions altogether. "Keeping inflation low and keeping inflation expectations low and stable actually gives the Fed more leeway to respond to more short-term shocks," Bernanke explained.

The inflation rate is the one economic indicator that the Fed has nearly absolute control over, Bernanke said repeatedly. "The longer-run inflation outlook is determined almost entirely by monetary policy," he emphasized.

The implication: If the Fed loses its power over inflation and prices get out of control, or even if investors lose confidence in its commitment to keeping prices down, then the central bank would no longer be able to help rescue the American economy in an increasingly unstable world.

With Greece at risk of potentially defaulting on its debt and ratings agencies contemplating a downgrade of U.S. debt as Congress spars over raising the debt ceiling -- both of which are possible short-term shocks that could endanger the American economic recovery -- it seems that history could vindicate Bernanke for safeguarding the Fed's power and credibility.

But now with Bernanke taking an increasingly detached view of the economic recovery, it seems that the millions of Americans who are unemployed and underemployed could be losing their last major champions on the mountain where policymakers decree economic policy for the masses.

Bernanke tried to argue Wednesday that by keeping interest rates near zero and flooding the economy with $600 billion in a bond-buying program, the Federal Reserve has done all that it could do to meet its dual mandate of curbing inflation and promoting maximum employment.

He seemed to try to place responsibility for the economic recovery outside the confines of the Federal Reserve.

"I don't think that sharp immediate cuts in the deficit would create more jobs," Bernanke said in a poker-faced response to a journalist's question. "I think what people will understand -- should understand -- is that our budgetary problems are very long-run in nature."

"The most efficient and effective way to address our fiscal problems is to take a longer-run perspective and to focus our cuts not on the near term but by taking a long-run perspective and by making it a credible plan," he added.

Bernanke spoke largely in terms of the economic principles that hold true in classrooms. But these facts have not played a major role in the current debate in Congress, where Republicans are threatening to not raise the debt ceiling unless Democrats agree to immediate, off-setting spending cuts. If Congress does not raise the U.S. borrowing limit, it could cause an economic crisis even worse than the 2008 crisis, warned the Treasury Department.

Most economists think that Bernanke has been doing about as well as he can under the constrained circumstances.

"I think at this point 'wait and see' really is the best thing that the Fed can do," said Nigel Gault, chief U.S. economist at IHS Global Insight.

The central problem, Gault said, is that the only economic policy that really could help the economy -- a stimulus enacted by Congress and the White House -- has become discredited as a force that would get in the way of an economic recovery, when in fact it could be the best way to revitalize the economy.

"Normally you expect the center wings of both parties to be able to come to common ground, but that's not possible because the center isn't running things at the moment," Gault said. "It's the wings of the parties that are running things."

Gary Burtless, an economist at the Brookings Institution, agreed that a fiscal stimulus targeted at rebuilding infrastructure and encouraging private-sector employment would be the most effective economic policy. Barring that, however, he said that the Federal Reserve should consider raising its inflation target up to 4 percent to boost job growth.

Nonetheless, Burtless said he believes it is unlikely for the central bank to change its stance, since the Fed seems to have decided to focus on its mandate to curb inflation at the expense of trying to bring down the unemployment rate.

"I believe that the Federal Reserve thinks it has done as much as it can do, while maintaining its credibility as an inflation watchman to spur this particular recovery," Burtless said. "They may be wrong, but I don't think they're wrong by a huge amount."

"I think really the burden of doing something about the current economic situation is for fiscal policy," he added. "It is not for monetary policy."