Editorial: US debate should take on the Fed

5:30 AM Wednesday Oct 3, 2012

When President Obama and his rival presidential candidate Mitt Romney engage in their first television debate tomorrow, many besides Americans will be watching in hope that either man might offer a credible return to economic growth.

The American economy has had huge fiscal stimulants since 2008, first under President Bush and then Mr Obama, and is now on to its third monetary injection from the United States Federal Reserve. Yet business remains reluctant to expand, and unemployment remains high.

The most important figure in US economic policy will not be taking part in the debate and such is the status of a chairman of the Federal Reserve that Ben Bernanke might not be directly criticised. But it is time his prescription for the economy was seriously questioned.

In a speech yesterday, Mr Bernanke elaborated on his recent announcement that the Federal Reserve expected to keep interest rates near zero through to at least mid-2015. He sought to reassure investors that it "doesn't mean we expect the economy to be weak through 2015". Rather, he said the Fed expected to keep rates low well after the economy strengthens.

Central bankers in other countries, including New Zealand, might be surprised at that intention. They are wary of the inflation that could be rekindled by the stimulants their economies have received and will start to lift interest rates carefully when the recovery picks up.

There are two possible interpretations of Mr Bernanke's statement yesterday. One is that he does not mean it but hopes business will believe it and start investing with confidence that he will not "take away the punch as soon as the party starts", as the saying goes.

The other interpretation is that he does mean it and sees no risk of inflation when the recovery gathers pace. Financial markets clearly think he means it and they expect inflation to return, which is why they have been depreciating the US dollar against other currencies each time the Fed indulges in more quantitative easing.

It is all too possible that markets believe the Fed would welcome a period of inflation to reduce government debts built up by the fiscal stimulus. The best that can be said for the US fiscal and monetary responses to the global financial crisis is that the recession might have been much worse without them. Mr Obama will make that argument in the debate.

Mr Romney will argue that the stimulants are not working. He will concentrate on the fiscal stimulus, because the scale of government spending under Mr Obama is a big issue for Republicans, and might not bring Mr Bernanke into the debate. But Mr Romney has previously said that if elected he will replace Mr Bernanke.

"I'd be looking for somebody new," Mr Romney said in a debate before the Republican primaries. "I think Ben Bernanke has overinflated the amount of currency he has created."

That was a year ago, after the second quantitative easing.

A third was needed a few weeks ago and nobody is claiming it will help get the economy moving. It will keep the US dollar weak and currencies such as New Zealand's high, reducing our exporters' returns and fuelling political criticism of our own sound money.

Every country can be hurt by poor economic policy in the US. If Mr Romney spends his debating time talking only of tax cuts and unlikely fiscal savings, few outside America will take much notice. If he dares bring Mr Bernanke into the debate, he means business.