Paul Krugman seems generally upset at Bernanke’s performance

Ben Bernanke:

These are tempestuous times, but when the storm is long past the ocean will be flat again.

OK, not a literal quote, but pretty much what he said.

I understand the frustration, but I don’t know if Krugman has carefully articulated what I would consider useful policy alternatives. No doubt one could glean the appropriate policy from his blogs and columns if you already had the base of knowledge and a sense of central banking. However, at this point I think a genuine public conversation needs more than that.

Michael Woodford is more explicit

Mr Bernanke can and should use his speech today to explain how his policy intentions are conditional upon future developments.

A clarification could help the economy in two ways. First, he could signal that a temporary increase in inflation will be allowed, before policy tightening is warranted. This would stimulate spending by lowering real interest rates. Second, specifying the size of any permanent price-level increase would avoid an increase in uncertainty about the long-run price level. This in turn would ward off an increase in inflation risk premiums that might otherwise counteract the desirable effect of the increase in near-term inflation expectations.

This has long been my preferred policy but even here I think this is too much. I was excited when NY President Dudley gave a speech outlining how level targeting would work in practice but it fell flat.

I actually now think the more realistic approach is for the Fed to continually harden its commitment to keeping the federal fund rate low for several years. This is actually the most clear signal that can be sent to market participants.

One lesson that we should learn – but I think is being missed – is that more information does not mean more clarity. Market participants are confused by analysis that seems plain to monetary economists.

Instead, the Fed should signal this “It is extremely likely that you are going to experience free short term financing for years to come” 

When the Fed wants to loosen more it needs to make it clear that free short term financing is even more likely for an even longer period. Trying to explain level targeting to market participants is a recipe for confusion.