With much of the media obsessing about the Supreme Court’s imminent decision on Obamacare, there was news today that is quite likely to have more impact on the outcome of the election: Fed chairman Ben Bernanke said that unless the jobs market picks up soon, he and his colleagues will take more action to boost the economy. “If we are not seeing sustained improvement in the labor market, that would require additional action,” Bernanke told a news conference.
Political journalists love the Supreme Court story because it is dramatic. Five conservative justices look set to upend the signature policy of a democratically elected President. But the political consequences of the SCOTUS decision are hard to predict, and by November they may well have dissipated. Assuming the conventional wisdom is correct (often a dangerous bet) and the justices strike down the individual mandate, or even the entire reform, their decision will enrage liberals and fire up conservatives. But conservatives and liberals are already fired up and enraged. Many moderate voters will probably dismiss the whole thing as a political squabble, which is ultimately what it is, or decide that it’s too complicated to bother with, especially since much of the reform is still in the planning stage.
Whatever the Fed does, by contrast, will still be reverberating going into October and November. The June jobs figures will be released on July 6th. With job vacancies apparently on the decline, it seems very unlikely that there has been a big turnaround since May, when the economy created just sixty-nine thousand jobs and the unemployment rate ticked up to 8.2 per cent. Assuming that we get another lackluster set of figures, it seems pretty certain that the Fed will act, probably at its next meeting, which is on July 31st and August 1st.
This timetable bears inspection. If job growth perks up of its own accord, it will give Obama a boost. But let’s assume it doesn’t perk up. Going into the convention season and September-October, the Fed will be busy trying to gee up the economy. If past history is a guide, this will lead to a rally on Wall Street, and it will also give a modest boost, probably of temporary nature, to the economy at large. Whether this will be enough to tip things in Obama’s favor is impossible to say, but either way, it would be an important development. With virtually all the polls confirming that the economy is the overwhelming issue to voters, any change in Fed policy is sure to have political consequences.
It isn’t clear precisely what would be involved in more monetary easing. One element, almost certainly, would be another round of asset purchases, in which the Fed effectively prints hundreds of billions of dollars and uses it to to buy government bonds and other financial securities. Twice before, the Fed has injected money into the markets in this way—a technique known as quantitative easing. QE1 and QE2 both were accompanied by rallies on Wall Street. In order to have much of an effect, QE3 might well have to be even larger.
And Bernanke might also have other tricks up his sleeve. At his press conference today, he said the Fed was studying the Bank of England’s announcement that it is planning to extend credit to banks on a generous basis if the banks agree to lend the money to companies that are expanding and hiring. Under harsh questioning from journalists, who suggested that the Fed was being too timid, Bernanke repeatedly said he and his colleagues were just biding their time. “There is an issue about whether there is sufficient stimulus in the economy,” he said. And he went on: “We still do have the scope to do more, we are prepared to do more.”
Clearly, the Romney campaign would prefer for the Fed to do nothing, which is pretty much what it has been doing for the last year, or so. (“Operation Twist,” the Fed program that Bernanke has now extended, is too small to make a big difference to the economy.) In his interview with CBS’ “Face the Nation” a few days ago, the Mittster said that QE2 had proved an ineffective policy, and he warned that launching QE3 could have an adverse effect on the dollar. Bernanke today freely conceded that there were potential costs to such a program, one of which was the consequences it might have for financial stability. But he also strongly hinted that he believes the potential benefits are higher than the costs.
After waiting for a very long time, the Fed appears about ready to get off its hands. Which means that Bernanke, despite all his protestations that the Fed is a non-partisan institution that bases its judgements on economics rather than politics, is destined to become an important player in the election, and quite possibly a lightning rod. He is, of course, a Republican economist who was appointed to the Fed by a Republican President. But you can expect G.O.P. criticisms of him to intensify.
Photograph by Alex Wong/Getty Images.
