Can Bernanke Commit for Two Years?

Charlie Plosser, the President of the Philly Fed, was my thesis adviser. He is a well-respected, thoughtful professor who does not seek attention. Imagine my surprise when he openly criticises Bernanke’s latest experiment announcing that the Fed will keep rates at zero for two years!

But Charlie is right…his argument is that the US is not in recession and, moreover, inflation is not negative. A lot can happen in two years – unemployment could fall, a few quarters of rapid growth or an asset bubble – and suddenly the Fed is juxtaposed between showing commitment to its two year promise or raising rates. Why should the Fed lock itself in?

Bernanke has an ego and a strong aversion to ‘freshwater economics’. Charlie and the two other dissenters will be ignored at the Fed and should just walk out.