“There would appear — all else being equal — to be a case for further action,” Federal Reserve chairman Ben Bernanke said in a speech today. But purchasing more Treasury bonds and managing the rate of inflation by monkeying around with interest rates can only do so much, and the Fed chairman warned. For instance:
Whereas monetary policy makers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy.
So don't go looking at him if you still can't get a job. Bernanke also made clear that the Fed is flying by the seat of its pants here, and it's possible that things won't work out the way they hope.
Possible costs must be weighed against the potential benefits of nonconventional policies. One disadvantage of asset purchases relative to conventional monetary policy is that we have much less experience in judging the economic effects of this policy instrument, which makes it challenging to determine the appropriate quantity and pace of purchases and to communicate this policy response to the public. Another concern associated with additional securities purchases is that substantial further expansion of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time.
And if this happens it will, of course, be your fault.
Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations, to a level above the Committee's inflation objective.
That's all. Don't say he didn't warn you!
Monetary Policy Objectives and Tools in a Low-Inflation Environment [Federal Reserve via NYT]