When I saw the AP headline “Bernanke: Fed will take action if economy falters,” my reaction was, Dude, what are you waiting for? The economy faltered two years ago and the “recovery” has been, to say the least, modest.
My second thought, though, was What can the Fed actually do at this point? Interest rates are practically zero at this point.
Bernanke described the economic outlook as “inherently uncertain” and said the economy “remains vulnerable to unexpected developments.”
Although Bernanke acknowledged the recent pace of growth is “less vigorous than we expected” he still believed the economy would pick up next year. And he again seemed to downplay the odds of an another recession as he sought to bolster already shaky consumer and investor confidence.
Bernanke stopped short of committing to any specific action. But he raised the prospect of another Fed purchase of securities, most likely government debt or mortgage securities, to drive down rates on mortgages and other debt to spur more spending by Americans.
“I believe that additional purchases of longer-term securities should the FOMC choose to undertake them, would be effective in further easing financial conditions.” he said. The FOMC stands for the Federal Open Market Committee, the group of Fed policymakers that makes decisions on interest rates and other steps to aid the economy.
The other two options he laid out are:
- Providing more information in the Fed’s post-meeting policy statements about how long Fed policymakers would continue to keep rates at record lows. For more than a year, the Fed has been pledging to hold rates at ultra-low levels for an “extended period.”
- Cutting to zero the interest the Fed pays for banks to keep money parked at the Fed. That rate is now 0.25 percent.
“The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do,” Bernanke said. “The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using each tool.”
While I’m not an economist, those measures — which they’re inexplicably holding in reserve until things really get bad — strike me as amazingly tepid. Interest rates are at the lowest level in memory, so I don’t see them as a barrier to investment.
Mostly, people making decisions about long term spending lack confidence that the economy is going to rebound. If I’m worried the price of the house that I’m thinking of buying is going to drop 20 percent over the next couple of years, offering to sell it to me at 1% APR isn’t going to easy my concern. Similarly, if the banker doesn’t think the guy across the table from him is going to have a job in six months, the fact that he’s not making any interest on the money, anyway, won’t suddenly turn it into a prudent risk.
Going back to the early 1980s, we’ve come to rely on the Fed and the manipulation of monetary policy to be the primary mechanism for stimulating and cooling the economy. But we’ve pretty much exhausted the limits of that for this recession. What else you got?
