Ben and the sorcerer's apprentice


December 17, 2012


At their last meeting for 2012, the Fed and its Chairman were in generous pre-Christmas mood. Bernanke announced further bond purchases – altogether USD 85 bn per month. In addition the Fed promised – with some caveats – not to touch interest rates until the unemployment rate has dropped to 6 1/2%.

After decades of monetary targeting, inflation targeting and inflation expectation targeting we managed to come back to the good old Phillips curve! However, one should not underestimate the risks of Bernanke’s policy. Can we rule out that the natural unemployment rate in the US has not permanently risen during the crisis? This would mean that inflation can start accelerating much earlier and that the Fed might have a hard time to get rid of the spirits that it called. This is admittedly a medium-term problem, but the risk of further bubbles in asset markets is much more imminent. It is pretty amazing that after lots of soul-searching and at least some mea culpa from central bankers following the burst of the mid-2000s bubble, the Fed is doing it again. With the first major central bank taking the unemployment rate into focus, calls in Europe for a similar mandate for the ECB can only grow.



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