A rough summary of Ben Bernanke's speech at the Federal Reserve's gathering in Jackson Hole on Friday is that the US economy needs more help from policymakers -- but that the central bank will only provide a bit of it.
"I do not expect the long-run growth potential of the US economy to be materially affected by the crisis and the recession if -- and I stress if -- our country takes the necessary steps to secure that outcome," the Fed chairman said.
The implicit message of those words is that, while the Fed will do everything it can, other policymakers are not taking those necessary steps. The Fed's job is to deliver low and stable inflation and economic stability, but "most of the economic policies that support robust economic growth in the long run are outside the province of the central bank".
He called for "good, proactive housing policies", expressed an implausible degree of confidence in Europe's ability to tackle its sovereign debt problems and, in some of his harshest words ever on fiscal policy, he said that Washington's agonized debate on raising the federal debt ceiling had hurt the economy.
"The country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well," Mr. Bernanke said.
Mr. Bernanke has gradually ramped up his rhetoric on fiscal policy in recent months but it was the first time that he has suggested that the US budget process is so dysfunctional that it needs reform.
"These were some very strong words from chairman Bernanke on fiscal policy, and we can only hope policymakers take note. There is no question that with all that needs to be done to grow the economy, fiscal policy continues to be the missing link," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
Although he did not say so outright, Mr. Bernanke implied that he would support more fiscal stimulus now, in order to tackle the long-term unemployment that he said could leave a "major scar" on the US economy.
"Our economy is suffering today from an extraordinarily high level of long-term unemployment, with nearly half of the unemployed having been out of work for more than six months," he said. Fiscal policymakers urgently need to deal with America's long-term budget problems but they "should not, as a consequence, disregard the fragility of the current economic recovery".
Mr. Bernanke's words reflect a growing sense that, while the Fed can and should do more to make sure inflation stays at its 2 per cent target, tax and spending decisions have greater power to influence an economy in which consumers are still paying down debt after the financial crisis.
His statement that the Fed "is prepared to employ its tools as appropriate to promote a stronger economic recovery" was a fairly robust signal that the central bank is ready to do more, most probably at its next meeting in September, which was extended to last for two days.
But the rest of the speech, which lacked any discussion of those tools and focused on longer-run challenges and the role of fiscal and other kinds of policy, seemed designed to limit expectations of how much the central bank might do.
In particular, there was no encouragement to think that the Fed will soon launch a third round of quantitative easing -- a QE3, like the QE2 announced last November -- under which it would buy hundreds of billions of dollars more in long-term assets as part of a further attempt to drive down long-term interest rates.
Even though Mr. Bernanke did not elaborate in Jackson Hole, a more likely easing option is to tilt the Fed's existing portfolio of assets towards more long-term securities, a policy with its own nickname, a "twist".
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