September 18, 2014

Fiscal, Monetary Policy 'Working in Opposite Directions’

  • The federal budget is an expression of our country's values. Where we choose to spend and at what levels, how and who we tax, and the borrowing we...

Although Federal Reserve officials generally have their hands full with monetary policy, congressional mistakes and miscalculations on the federal budget have led outgoing Federal Reserve Chairman Ben Bernanke to repeatedly offer suggestions on fiscal policy that lawmakers would do well to heed.

Unfortunately, lawmakers have often focused deficit-reduction efforts on measures that have hindered the economic recovery in the short term -- while doing little to deal with the structural problems in the federal budget that will drive future deficits. The resulting drag on the economy has forced the Fed to take a more active role in supporting the recovery.

In one of his final speeches as Fed chair, Bernanke recently reminded elected officials once again of the need to take a more thoughtful approach to fiscal restraint.

“Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive,” Bernanke told the American Economic Association. “Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be.”

The Senate last week confirmed Janet Yellen as his successor. She has also frequently warned against overly restrictive short-term fiscal policies.