The Federal Reserve Vs. The Budget

Ben Bernanke does not like deficits and increases in the national debt. He also believes that the economy needs to be stimulated which is why he continues to maintain his faith in QE2.

The new Budget is not likely to pass Bernanke’s test. The deficit this year will be $1.6 trillion, to some extent because of tax cuts. Next year it will be $1.1 trillion. The national debt will rise by $7.2 trillion over the decade which the Budget forecast covers.

The tension between the Fed and the Budget cannot be seen more clearly than in a recent presentation by NY Fed chief William Dudley. He expresses only modest optimism about the recovery. The “headwinds” that face GDP improvement have hardly abated. Job creation of the sort that the Budget assumes may not be attainable.

Dudley remarked in his Quarterly Regional Economic Press Briefing. ”The decline in the jobless rate was not an unmitigated positive, as a significant part of this decline was due to fewer people looking for work.”. He added:

As banks and other financial institutions seek to strengthen their balance sheets and avoid future credit losses, they may keep credit conditions tighter than normal. In addition, many consumers’ borrowing options may be limited by their impaired credit histories, and the recovery is not getting the strong boost from home construction that most previous recoveries have benefited from,

Dudley did not mention economic challenges which are different from those raised by Fed members who support QE2 hundreds of times. He did say he could not be sanguine about resolutions.

The Fed’s view of the economy expressed through the comments by Bernanke and Dudley are part of the publicity campaign to promote the central bank’s $600 billion bond purchase program. Just because it is part of that agenda does not mean it is anything less than an accurate assessment of America’s economic problems.

Dudley looks at a future, at least in the near term, where the glass in half empty. The assumptions behind the Budget are based on a glass that is nearly full.