Bernanke and Poole Ruminate on Risks

At a conference about “Monetary Policy Under Uncertainty” hosted by the Federal Reserve Bank of St. Louis came this audience question.

Bernanke

“I’d like to ask each of the panelists, to the extent they feel comfortable talking about this, to tell us what they see as the largest single source of uncertainty confronting monetary-policy decision makers over the course of the next decade,” Boston University economist Robert King said.

The question was met at first with silence by the panel, which included Fed Chairman Ben Bernanke appearing by a choppy video feed from Washington. “Did that come through to you?” the moderator asked the chairman.

“Um, it came through,” Mr. Bernanke said dryly, drawing laughter from the room of economists. “I think I will say something about known unknowns and unknown unknowns.”

He continued: “The structure of the economy changes continually — new shocks, new developments, new financial innovations. All those things make it very difficult to anticipate very far in advance what the new shocks and what the new challenges are going to be. … I think part of the reason why we still have human beings in the central bank and haven’t turned it over to a computer entirely is that we need to be able to assess these new developments and to respond appropriately.”

Poole

William Poole, the St. Louis Fed president, said it’s actually easier to discuss problems in the next decade rather than the next few months. Changing demographics and the resulting fiscal problem — imbalances in Social Security and Medicare programs — present the largest challenge, he said. “Our society is going to have to grapple with some combination of benefit cuts and tax increases, and I’m not going to enter the political argument about how much it should be of each one,” Mr. Poole said. “We must grapple with that because the fiscal deficit from those programs is just too much to be sustained.”

Monetary policy would come under intense pressure “if we had an enormous fiscal failure where the government, not coming to grips, kept issuing more and more bonds to finance the deficits,” Mr. Poole said. “One of the things that we’re going to have to do is to insist that we are not going finance these deficits by printing money. All that will do will be to compound the chaos.”