Fed a Line of Bull by the NYT

“Fed Wants Priority Put on Deficit” was the New York Times‘ headline over Binyamin Appelbaum’s June 8 story on the front page of the business section. Summarizing a speech Fed chair Ben Bernanke gave the day before, Appelbaum wrote, “He said that growth remained slow and uneven, but he made no mention of the possibility that the Fed would intervene, noting instead that ‘a healthy economic future’ required a plan to shrink the federal deficit.”

Appelbaum also cited a speech by the head of the New York Fed, a member of the national Fed’s board of governors: “William C. Dudley, one of Mr. Bernanke’s top lieutenants, expanded on the same theme Tuesday night, saying that the government needed to balance its books, and that the nation needed to reduce its dependence on borrowing and consumption.”

So the Federal Reserve is getting behind the current efforts in Washington to cut the deficit–efforts that have been greeted by widespread enthusiasm in corporate media? Though that’s the impression you might get from reading the Times article, that’s entirely incorrect.

Here’s what Bernanke actually said (emphasis added):

If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

In other words, cutting the deficit in the short term would be bad for the economy; what’s needed is a long-term strategy for deficit reduction.

Likewise, Dudley also warned about the danger of near-term deficit reduction:

As discussed earlier, no issue is more important than a credible commitment for getting our fiscal house in order, but at a pace that does not forestall a sustained economic recovery. What is needed here is fiscal consolidation that begins slowly, builds over time to substantial magnitude, and is difficult to dismantle–i.e., it requires the commitment of both political parties.

Nobody in Washington is saying that the U.S. can indefinitely ignore its budget deficit. The divide is between people insisting on immediate cuts in federal spending–you might call them “people who want priority put on deficit”–and those who maintain that cutting too quickly would damage the fragile recovery. Bernanke and Dudley are clearly in the latter camp, yet the New York Times makes that very difficult to figure out.

In the very last paragraph of this 19-paragraph piece, Appelbaum finally alludes to the fact that his sources are not actually saying what he’s suggesting that they’re saying:

“Policymakers urgently need to put the federal governments’ finances on a sustainable trajectory,” Mr. Bernanke said. Such a plan should not impose large spending cuts immediately, he cautioned, but it could produce immediate benefits “by leading to lower long-term interest rates and increased consumer and business confidence.”

“Such a plan should not impose large spending cuts immediately”: In order to inform readers where Bernanke and Dudley were coming down on the current budget debate in Washington, those words needed to be at the top of the piece. As it is, this is an example of an article where many readers probably knew more before they started reading it than they did when they finished.