Jumping directly to the conclusion: Because the Fed wishes it so!

But that doesn´t sound right. Isn´t the Fed on record saying that it´s “ready to act if conditions so require”? Yes, it is, but if you pay attention that´s an open-ended statement. Bernanke can always show the economy is growing, albeit slowly because of ‘headwinds’ (Europe?) and that inflation is close to the now official 2% target. And then there are always the ‘structural’ elements that keep employment low and unemployment high. But that´s outside the province or power of the Fed.

The panel below shows what happened to nominal spending (NGDP or Aggregate Demand), real output (RGDP) and inflation during the recovery from the 1981-82, 1990-91, 2001 and 2007-09 recessions.

The Fed controls nominal spending pretty closely. The recovery from the 1981-82 recession (that marked the end of the ‘Great Inflation’ years) was exuberant or robust and note that there was no loss of inflation control.

The recovery after the 1990-91 recession was much more subdued. Granted the fall had also been much milder. There was talk of the Fed engaging in ‘opportunistic disinflation’. The fact is that nominal spending growth didn´t rise immediately and when it did it was restrained. Inflation came down a few notches.

The recovery from the 2001 recession was surprising at the time, being famously called ‘jobless recovery’. Note that nominal spending growth only rises after inflation had fallen to undesirable levels, with the Fed talking about the risk of deflation!

And the last chart shows that not only the drop this time around was very deep but there´s no compensating spending growth that would be required to bring unemployment down. This time it´s more of a ‘job loss’ non recovery. And the Fed seems completely satisfied with that state of affairs. If not it would be fully engaged in getting spending up, just as it did in 2003 when there was a whiff of deflation.

John Cochrane has a take:

This argument has been batted back and forth, but a new angle occurred to me: If it was so obvious that this recovery would be slow, then the Administration’s forecasts should have reflected it. Were they saying at the time, “normally, the economy bounces back quickly after deep recessions, but it’s destined to be slow this time, because recoveries from housing “bubbles” and financial crises are always slow?” No, as it turns out.

And so does David Altig:

And I am certainly begging the important issues. Would the economy have achieved even the somewhat unspectacular pace of 2 percent GDP growth, 150,000 jobs per month, and average inflation near the long-run objective absent large-scale asset purchases (“QE2”), forward guidance (statements indicating that policy rates are expected to be exceptionally low through at least late 2014), and maturity extension programs (“Operation Twist”)? Does “appropriate policy” imply that more must be done to achieve even the modest progress in the unemployment rate implied in my calculations above? And could we have (looking backward) or can we (looking forward) do even better with an even more aggressive approach, as many Fed critics argue? Good questions, those.