Tuesday, Sep. 15, 2009

Buying the Fed's "Recovery"

Ben Bernanke uttered the words after a speech at the Brookings Institution, the Washington think tank. Strobe Talbott, the Brookings president, had asked the Federal Reserve chairman about the employment outlook. It took Bernanke 417 words to answer him, and his basic message was that the outlook wasn't so good. But along the way, he said two things that made front-page headlines the world over. "I've seen some agreement among the forecasting community at this point that we are in a recovery" was the first, and "From a technical perspective, the recession is very likely over at this point" was the second.

Stop the presses: the Fed chairman says the recession is over and the recovery has begun! Never mind that, as Bernanke noted, this is by now common opinion among economic forecasters — and has been for weeks. Also never mind that Bernanke's prediction record as Fed chairman hasn't been stellar. This is the man, after all, who told Congress in March 2007 that "the impact ... of the problems in the subprime market seems likely to be contained."

So why are we nonetheless making a big deal out of the Fed chairman's words? Partly because he's powerful. Bernanke's opinions on the economy's future shape the U.S. government's decisions about interest rates, bailout efforts and the like. Right now the main monetary-policy debate is between those who think the recovery will be weak and fitful — and thus the Fed should keep doing what it can to stimulate the economy — and those who think it will be rip-roaring enough that further spending would spark inflation. At Brookings, Bernanke seemed to indicate that he stood with the first group. So while the recession may be over, he isn't saying that happy days are here again.

Our reaction to his statement feels more ritualistic than rational. After all, unemployment is still nudging 10%, and foreclosure rates remain high. Yet the Great Fed Shaman has pronounced the recession monster dead. Let us rejoice.