The Fed is worried, but leaves policy on hold
Fed Ben Bernanke testifies before the Senate in July. / AP Photo/Carolyn Kaster
(MoneyWatch) The Federal Reserve's monetary policy committee did not offer any bold new moves at the conclusion of its two-day meeting. The committee reiterated its plan to keep interest rates exceptionally low through the end of 2014, and noted once again its plan to extend operation twist, its attempt to lower long-term interest rates, through the end of the year. But despite falling short on both its inflation and employment mandates, and widespread speculation by outside analysts that the Fed would do more to help the economy, policy remains on the same trajectory it was on before the meeting began.
The Fed indicated that the economic outlook has worsened since its last monetary policy meeting, and that makes it more likely it will take further action at some point in the future if conditions don't improve. But the decision to maintain current policy for now will disappoint analysts outside the Fed who have been calling for the Fed to do more.
If the Fed does do more at its next meeting, it is likely to follow one of the two policies Chairman Ben Bernanke emphasized in his recent testimony before Congress. In those remarks, Bernanke indicated that if the Fed does ease policy further, it is most likely to either engage in an additional round of quantitative easing, or extend its forward guidance on interest rates beyond the current guidance that rates will remain low through the end of 2014. Both of these policies would reduce interest rates some, but with interest rates already at historic lows, neither of these policies is likely to have a large impact on the economy and many observers both inside and outside the Fed are calling for more aggressive, creative moves.
Watch: What can the Fed to jolt the economy
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One frequently mentioned policy is lowering the interest the Fed pays on reserves. The Fed currently pays interest of 0.25 percent on any required or excess reserves that banks hold, and many people outside the Fed are calling for the Fed to reduce the rate to zero. The idea is that this would give banks more of an incentive to lend money to businesses and consumers, and the increased spending that would result from an increase in loans would spur economic activity and speed the recovery.
However, this idea has come up before, and as I
explained in November 2010, the Fed is unlikely to adopt this policy:
First, reducing the interest rate on reserves would potentially increase the supply of loans, but the supply of loans is not the constraining factor, it's the demand. Businesses already have large cash reserves they could use to fund new investments, but they aren't using the funds for this purpose and it's not clear how making more cash available will change that. Businesses need to feel more optimistic about the future before they will make new investments, and until that happens making more funds available won't do much good.
Second, a quarter of a percentage point is not much of a disincentive to lending. Actual interest rates that consumers and businesses pay are higher than that, and rates have fluctuated by more than a quarter of a percent without a having much of an impact on investment and consumption.
Third, the Fed is unwilling to cutting the rate it pays on reserves to zero due to fears this would disrupt the federal funds market. Bernanke's argument is:
"The rationale for not going all the way to zero has been that we want the short-term money markets, like the federal funds market, to continue to function in a reasonable way," he said.Cardiff Garcia at FT Alphaville has an extended discussion of this argument, but the main point is that Bernanke is not in favor of this policy and he has not said anything to indicate he has changed his mind since he made these remarks. If the economy continues to stagnate, this policy could still happen when the Fed meets next, but it seems unlikely. It is more likely that the Fed will remain within the parameters Bernanke emphasized -- more quantitative easing or more forward guidance for interest rates.
"Because if rates go to zero, there will be no incentive for buying and selling federal funds -- overnight money in the banking system -- and if that market shuts down -- it'll be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future."
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Obama is a driving force behind our economic stagnation because he's created an environment unfavorable to business investment and growth. That will inevitably continue as long as we have a big-government anti-capitalist ideologue in the White House, who is trying to adjust our system of free-enterprise to correct the perceived wrongs of capitalism. Correcting these "wrongs" requires the big-hand of government intervening in the free-market system, with more regulation, spending, taxes, debt, and welfare. The terrible state of the economy is the "collateral damage" necessary to achieve his long-term objective of "spreading the wealth around".
Of course, the majority of Americans would be unwilling to sacrifice their standard of living for Obama's ideology, so he has to keep it hidden from the masses, as Saul Alinsky's "Rules for Radicals" would prescribe. Consequently, Obama must resort to deceit, deception, and false promises to achieve his ultimate objective.
Romney blames GM bailout for job losses:
http://www.cbsnews.com/8601-503544_162-57484452.html?assetTypeId=41&blogId=&tag=contentBody;commentWrapper
A slow recovery is, I suspect,preferable, although I admit painful. However, I would be far more concerned if the economy caught fire quickly burned hot; we would be soon back to the beginning of this recession.
Finally the federal government, congress and executive, does not have the power to significantly push the economy along to a great degree. It's the Constitution.
economy.
GM is alive, Bin Laden is dead and the economy is getting better. No thanks to the Republicans who are sabotaging all of Obama's efforts.
Who works for those economists and who do the economists represent? ;-)
GM is no better off - look at all the offshoring they did for years, hoping nobody else would because if everybody offshored, people would run out of jobs or see their wages shrink (with prosperity right behind that).
I could cite other factors to your examples, especially the corporate welfare you seem to tolerate and accept, but I suspect you will remain blissfully closed-minded. We've been here, done this, many times over.
We are doing much better than Europe who chose to do austerity instead of a stimulus. At least the money was used to create jobs in America, and not for democracy in Iraq.
our recovery will be faster.
Right now, we need stimulus and tax cuts to create more jobs; and austerity later when the economy is more stable.
We must find the correct balance. Too much austerity will slow down the economy. But too much tax cuts will increase the national debt.
I like the Democrat's plan better. The Democrat's formula is to keep a low tax rate, while still collect the same amount of revenue. This is only possible by removing tax loop holes and tax havens which many wealthy people exploit. We also need to reduce government expenditures. We must cut the military budget, entitlements, and unnecessary programs. I trust that Obama would do that.
The Republican plan for across the board tax cuts, would just increase our national debt. It may be popular, but that's just passing the problem to our children.
The GOP had everything between 2000 and 2006 - what happened then?
http://www.govtrack.us/congress/votes/108-2003/s202
(that's one example, note the red is for republican and they chose to ramp up the national debt - I'm sure between 2007 and 2009 the graph's red and blue were reversed... I'll let you look that one up and post the link for all to see, so have fun trying...)
But who cares about partisanship either way: Were you better off now than you were 10 years ago?
Or 40 years?
Your answer can be found with the graphs in this site:
http://www.realitybase.org/journal/2009/3/10/the-american-dream-died-in-february-1973.html
It's only been 3 years, but our economy is getting better. We are doing much better than Europe who choose to do austerity instead of stimulus. Obama did not have a choice. The alternative was a prolonged 1920s like depression.
I still think that Obama would do a better job in the economy, and in lowering our national debt in the future. Obama is frugal. He wears old shoes.
What we need is another stimulus. A big one this time, like a trillion dollars. Pay for it by going more into debt. Heck, we are spending a billion every three days in Afghanistan. We can afford to go into debt a bit more, even if Republicans scream and holler. Our biggest national problem is unemployment, not the debt. You have to borrow to plant seed if you want to eat---you can't just say lets save our money and just hope something grows by itself.
The first stimulus helped stop the economic free fall and reduced unemployment significantly. It was definitely a success. But it was not big enough, as several economists like Krugman and Stiglitz said at the time. Also, a third of the stimulus was given away as tax cuts in an attempt to placate Republicans, who still ended up voting against it. Republicans are never going to vote for a stimulus because they want the economy to fail---they are hoping people will blame Obama, and they don't want to give him any successes, even if people are suffering.
Yes, it was bordering on criminal that so much of the TARP money went to Wall Street bankers, many who got bonuses even after nearly collapsing the economy. But don't blame Obama's stimulus for that!