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Dow Hits 5-Year High, Nasdaq Above 3000 But Romer Laments Fed’s “Missed Opportunity”

Aaron Task
Daily Ticker

The Federal Reserve kept rates unchanged at its policy meeting Tuesday, reiterating its pledge to keep rates at "exceptionally low" levels (i.e. zero) through late 2014, at least. Citing "improved" labor conditions and an economy that has been "expanding moderately" the Fed also held back on discussing plans for QE3, Operation Twist or any other additional stimulus.

The former was widely expected. The latter was disappointing to some Fed watchers, including Christina Romer, former head of President Obama's Council of Economic Advisers.

Given the Fed's forecast for subdued inflation and "moderate economic growth" over the coming few quarters, Romer can't help but wonder: "Why aren't they doing more to help the economy?"

To be sure, much of the macro economic data lately has been better than expected and the stock market continues to push higher. On Tuesday, the Dow rose 218 points to 13,178, its highest close since 2007, while the Nasdaq rose 1.9% to 3,059, its best close since 2000.

The Dow was aided by JP Morgan's afternoon dividend hike and buyback announcement ahead of the Fed's 4:30 p.m. release of bank stress test results.

But "there's a big difference between [better than expected] and objectively good," Romer notes. "The economy still has very high unemployment, still struggling to recover and undo the damage done in the recession, the kind of numbers we've seen aren't strong enough."

Furthermore, inflation is running well below the Fed's target and the unemployment rate well above its target, meaning the Fed is failing on both of its so-called dual mandates, she says, reiterating a prior critique of the central bank. (See: Christina Romer: The Fed Is "Failing Terribly" and Needs to Do MORE, Not Less)

Given that, today's meeting was a "missed opportunity" for the Fed to do more to give the economy a boost, Romer says. "At a point where things are looking a little bit stronger, for the Fed to say 'even so we think a little more help for the economy would be a good thing', that could pack a more powerful expectations punch and could have more of an effect on growth."

Clearly this is a minority view and Romer concedes that the Fed faces pressure -- both internally and from Congress -- to rein in its uber-easy money policies, much less do more. But the U.C. Berkeley professor is adamant that conventional wisdom about the Fed is wrong.

"Coming out of a severe recession, you need a period of much more rapid GDP growth to bring the unemployment rate down quickly," she says. "We are certainly not through with this thing."

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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