Last Updated Aug 28, 2011 12:12 PM EDT
On Friday, Fed Chairman Ben Bernanke made an eagerly anticipated speech at the annual Kansas City Fed gala at Jackson Hole, Wyoming. His talk was closely reported, too, but he really said little about what the Fed could or might do to charge up the economy. One point that got great attention, though, was that the Fed's September policy meeting would be extended to two days, rather just the one day previously set.
Calling the longer meeting brings to mind the wry remark in Casablanca, from Police Captain Renault to Colonel Strasse of the Third Reich, on his attention to the theft of those valuable letters of transit and murder of the courier:
"Realizing the importance of the case, my men are rounding up twice the usual number of suspects."Bernanke himself said the longer session would "allow a fuller discussion." But what will the Fed be able to do act on its fullness?
By September 20th, the bankers will have several fresh and important data points -- the August unemployment report (which I suppose could be distorted by the strike of 45,000 Verizon workers, although that was wrapped up on August 23 or so); a few more weeks' reports of initial unemployment claims; another month's industrial production; and perhaps most important the Labor Day speech on jobs that President Obama is scheduled to deliver.
Chairman Bernanke added:
"The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability."Judging by the stock market Friday, up 1.5 percent, investors think this would mean another round of quantitative easing. (Or it may just have been short-covering before the hurricane weekend.) Yes, the economy is terrible, but it's improved from the emergency conditions that led to the first two rounds, so I think that is unlikely in September. So do noted experts:
"They will end up with QE3, but probably not in September," [said Diane Swonk, chief economist at Chicago-based Mesirow Financial Inc.], referring to a third round of bond purchases, also known as quantitative easing. "They will edge closer to it in the September statement."The Fed has already committed to low interest rates for two years, if needed. They also have promised to not withdraw the last QE, by continuing to buy long-term bonds as the ones in inventory mature.
Mr. Bernanke highlighted two areas of weakness, small business lending and housing, but it's hard to see what more the Fed can do to drum things up, other than keep interest rates low. There also has been talk of reducing the interest the Fed pays to banks on its deposits with the central bank, to get the money back to work in the economy and spur lending, but banks are citing low demand anyway.
Stretching out the September policy meeting to two days, to allow fuller discussion, also reminds me of the tactics of J.P. Morgan, in the teeth of the Panic of 1907, when he gathered 50 or so bankers in his private library (pictured above), and locked them in overnight until they coughed up $25 million for a private bailout of several failing brokerage and trust companies.
But there's an important difference: those bankers had reserves to call upon for a quick and direct solution, and that was a do-or-die situation that was threatening the entire U.S. banking system. In our case, we're not at the brink, and the Fed's measures are indirect, and take a while to have any effect.
Which is why Mr. Bernanke pointed out to Washington that the Fed can't do it all, and the responsibility to act is theirs, by coming up with a sensible housing policy, and a credible plan for a federal budget:
To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time.
The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses.
Of course, formal budget goals and mechanisms do not replace the need for fiscal policymakers to make the difficult choices that are needed to put the country's fiscal house in order, which means that public understanding of and support for the goals of fiscal policy are crucial.Yes, indeed, we need a rational plan to get our federal budget in order, and a short-term plan that will encourage consumers and businesses, and restore our growth.