The folks who run the U.S. Federal Reserve have been on an unusual media blitz that culminated in a rather downbeat appearance on 60 Minutes Sunday night by Chairman Ben Bernanke. This was not the Fed chief's first visit to the CBS program, which is not exactly known for its coverage of monetary affairs. But it was the first time he has so ardently defended the policy of quantitative easing and sought to shoot down its critics. Which, after all, is the purpose of the Fed's new we-are-an-open-book media tactics.
He effectively promised that QE3 is on the way. To do anything less would risk frightening a bond market that has already been factoring in much more aggressive bond buying by the Fed, once it becomes clear that the $600-billion (U.S.) allotted under QE2 isn't going to do much to boost business activity, let alone make a dent in unemployment.
It's questionable whether QE can work such miracles anyway, given that demand remains weak, interest rates are already at record lows and there seems to be no shortage of capital.
But the biggest complaint of the anti-easing crowd is that it will inevitably trigger a dangerous bout of inflation.
Mr. Bernanke dismissed such concerns as groundless, repeating his long-held view that deflation is the real enemy to be feared and asserting that he could hike interest rates in 15 minutes in the unlikely event that inflation began taking hold. That's true, but he would also be stopping the fragile economy in its tracks. And would he have the nerve to ratchet up rates in a slow economy when faced with a hostile Congress eager to strip the Fed of much of its independence?
The good news for Mr. Bernanke is that, without the help of QE2, a key measure of money supply is growing again. That would be MZM, or money with zero maturity. MZM, which is which is calculated by the St. Louis Fed, is the supply of financial assets redeemable at par (for the monetary purists, it's M2 minus small-denomination time deposits, plus institutional money funds). An increase means that more money is being put to work in the economy.
Is this the first sign, on the monetary side, of a real U.S. recovery? Mr. Bernanke and his supporters certainly have to hope that it is. Because QE3 certainly won't be the answer.