As Ben Bernanke was defending the Fed's record yesterday, the St. Louis regional bank's president was (implicitly?) criticizing a cornerstone of the central bank's response to the crisis – easier monetary policy.
Bernanke told lawmakers at his Senate confirmation hearing that the financial crisis would have been even worse if the Fed hadn’t taken strong action, including cutting interest rates “early and aggressively, reducing our target for the federal funds rate to nearly zero.”
At the same time, James Bullard, president of the St. Louis Fed, was telling a group of Dow Jones editors and reporters that the conventional wisdom on the relationship between monetary policy and high unemployment rates may need revision. He said rates may need to rise even if unemployment is still high. "If a tepid recovery in labor markets is just the new reality ... then you shouldn't be saying, 'oh, we are just going to keep interest rates where they are,’ based on labor market issues,” he told Dow Jones.
David Malpass, Malpass is president of Encima Global LLC, lent support to this idea in a timely Wall Street Journal Op-Ed yesterday. “With the system stabilized, the Fed hopes that artificially low interest rates and its purchases of mortgage-backed securities will spur growth. Instead they are pushing dollars abroad and wasting precious growth capital in asset and commodity bubbles.”