The Board of Governors of the Federal Reserve met yesterday to discuss what the Fed can do going forward to help pull out of this recession. Everyone expected them to come out of the meeting with some kind of plan to do something new, as the economy shows every sign of slipping back into recession.
The Fed could announce an intention to keep interest rates near zero through 2015, they could announce another round of Quantitative Easing (QE3) to inject some more monetary stimulus, they could allow inflation to grow a little bit to ease unemployment (their mandate, after all, is inflation and unemployment, and we are nowhere near an inflation crisis, no matter what conservatives say.)
Instead, they basically decided to do nothing. A mere extension of Operation Twist was announced, but as JP Morgan’s Chief Economist Michael Feroli said before the announcement, a continuation of OT is basically doing nothing, since it’s effects dull with time. In his press conference, Ben Bernanke said he is waiting on more proof that the economy really is slowing, indicating a possible willingness to move if next month’s economic numbers look bad again, but that there are things they can do in the future. He also commented on the risks of the policies available to the Fed, and basically begged for Congress to do something, anything.
I have problems with his answers. First, this is the second time in a month Bernanke has complained about Congressional inaction. Bernanke needs to realize that fiscal stimulus is not coming out of this Congress anytime soon. The Fed is the only tool we have to fight a recession, and 8.2% unemployment can’t be the goal for an institution whose mandate is to keep unemployment low. The excuses are getting old. The fears of imminent inflation are bogus; in fact, inflation is well below the 3% target set by the Fed itself! So, if inflation is below the target, and unemployment is over, and the economy is obviously slowing, why not do something now, instead of waiting? Waiting is just going to make it harder to act after the next meeting in August, as we will be three months out from the election, and any move to ease the economy will be interpreted by some as a political maneuver to fix the economy to help the President.
Second, his answers are almost contradictory. He says he has tools that could work, but then says he’s not sure if the tools’ “risks” are worth it? As Ezra Klein points out, this could mean that he knows that he has nothing that can fix things, but is scared to say so for fear of setting off already jittery markets.
Hopefully this isn’t the case, and he really is looking for more signs of long-term drop in growth, or waiting to see if Europe is going to go under. Either way, it’s frustrating to watch the Fed stand there waving the keys to economic growth, but refusing to open the door.
Previously at the Politics Blog: