Bernankeology

Why so much is read into the words of the Fed chairman.

Following Fed chairman Ben Bernanke's speech yesterday, the usual bout of trying to understand quite how much we can read in to his words has begun. Yet unlike the normally perjorative "Kremlinology" – attempting to infer things from the most minuscule turns of phrase – this Bernankeology is understandable and quite useful.

Central bankers have a strange job. They don't actually have many tools at their disposal; largely just the tripartite decision to raise, lower, or maintain interest rates. Yet many of the outcomes they create come, not from actually using this power, but from creating expectations as to their future use.

Suppose Bernanke knows he is likely to raise interest rates in the first quarter of 2013. Even though his actual power is relatively limited, he can create a wide spectrum of outcomes depending on how he announces this. The market reaction will be extremely different if Bernanke says now that he will raise rates in a years time, compared to if he maintains right up until the day that a rate rise would be inappropriate.

But this power to persuade brings with it its own problems. Just like a legislature, a central bank is fundamentally unable to constrain itself; it can make promises, but everyone knows that it is free to break them at any point.

All of this means that every speech Bernanke gives is likely to be very carefully aimed at creating just the right set of expectations. On the one hand, he can't ever gain a reputation for untrustworthiness, so they have to be scrupulously honest; on the other, actually saying what he believes may create the wrong impression.

Last week, Ryan Avent provided a detailed breakdown of exactly what the benefits of Bernankeology can be, focusing on the Fed's "forward guidance" where it hinted that it would keep interest rates low until at least 2013. He writes:

On the one hand, a pure focus on the language of the Fed's statement indicates that rates are likely to remain low through that period based on the state of the economy... On the other hand, the Fed may be hinting that it will be willing to keep rates low through late 2014 even if the trajectory of the economy warrants a rate increase.

In other words, the Fed might be attempting to commit itself to a deviation from its normal policy rules of the sort that might generate more rapid growth and inflation.

The problem the Fed has is that it needs to generate growth, but that growth is likely to come with relatively high inflation, of the sort which Bernanke has historically fought against. In order to help the economy, he needs to convince "the markets" that interest rates will be kept low even if inflation spirals out of control. The problem is that this, from an inflationary hawk like Bernanke, is unbelievable.

Avent points to a paper (pdf) which breaks down the distinction into two categories:

Delphic, corresponding to the first category above, and Odyssean, corresponding to the second, in which the central bank attempts to commit itself to deviations from typical rules.

Matt Yglesias offers a less refined version of the same strategy, breaking Bernanke's possible responses into an Eeyore response and a Tigger one. Either the Fed chief can "avoid optimistic forecasts as a way of signaling that rates will stay low for a long time," or he "can say we're climbing out of a steep hole so rates will stay low for the next 18 months come what may".

The test for Bernankeologists is to work out whether yesterday's gloomy speech is Odyssean-Eeyore, using gloominess as a mast to bind himself to, or simply Delphic, with the chairman making his most honest predictions and still being pessimistic.

Occupy LA activists march against the Fed in November. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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The big problem for the NHS? Local government cuts

Even a U-Turn on planned cuts to the service itself will still leave the NHS under heavy pressure. 

38Degrees has uncovered a series of grisly plans for the NHS over the coming years. Among the highlights: severe cuts to frontline services at the Midland Metropolitan Hospital, including but limited to the closure of its Accident and Emergency department. Elsewhere, one of three hospitals in Leicester, Leicestershire and Rutland are to be shuttered, while there will be cuts to acute services in Suffolk and North East Essex.

These cuts come despite an additional £8bn annual cash injection into the NHS, characterised as the bare minimum needed by Simon Stevens, the head of NHS England.

The cuts are outlined in draft sustainability and transformation plans (STP) that will be approved in October before kicking off a period of wider consultation.

The problem for the NHS is twofold: although its funding remains ringfenced, healthcare inflation means that in reality, the health service requires above-inflation increases to stand still. But the second, bigger problem aren’t cuts to the NHS but to the rest of government spending, particularly local government cuts.

That has seen more pressure on hospital beds as outpatients who require further non-emergency care have nowhere to go, increasing lifestyle problems as cash-strapped councils either close or increase prices at subsidised local authority gyms, build on green space to make the best out of Britain’s booming property market, and cut other corners to manage the growing backlog of devolved cuts.

All of which means even a bigger supply of cash for the NHS than the £8bn promised at the last election – even the bonanza pledged by Vote Leave in the referendum, in fact – will still find itself disappearing down the cracks left by cuts elsewhere. 

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.