…however, central banks in the real world are not staffed by me. The fact that the ranking official from the Federal Reserve has publicly stated that the Fed will not offset the sequester has immediately invalidated my previous views. Here is Ben Bernanke:
To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.
So there you have it. Despite Bernanke’s repeated claims that the Fed is not out of ammunition, the Fed will not move to offset the sequester’s spending cuts by maintaining nominal spending even on it’s current off-trend trajectory.
More realistically, if the negative effects of the budget sequester were to start showing up in the GDP, PCE, and employment numbers, the Fed would likely be forced to act. As I said before, I’m all for kicking the can down the road, which is what Bernanke wants to do, but certainly not eliminating it.