By Daniel Gross
Don't just do something! Sit there!
That's the approach the Federal Reserve seems to be taking. Faced with a flow of data that indicates a slowdown in the rate of growth, the Federal Open Market Committee announced Wednesday that it was essentially standing pat. And in his press conference yesterday afternoon, Federal Reserve Chairman Ben Bernanke didn't signal that bold new initiatives would be forthcoming anytime soon.
And that makes sense, says Bob Brusca, chief economist at FAO Economics in New York. "They're not doing much," he says in the accompanying interview. "But the Fed doesn't have much arrows left in the quiver." (Check out his blog here.)
The central bank did announce that it would continue "operation twist" — i.e. selling short-term bonds that it owns and using the proceeds to buy longer-dated bonds in the hopes of bringing long-term interest rates down. The Fed said it would also plow the proceeds of retired mortgage-backed securities into purchasing new ones. But it isn't conjuring up any new money to inject into the system.
Brusca says the continuation of these existing programs won't do much. "It helps in a very marginal way. Interest rates are at record lows. And it doesn't seem to me that low interest rates are what is broken. What's broken is the ability to access those rates. Credit is being rationed by banks."
Bernanke and his colleagues at the Fed have expressed some mystification as to why ordinary consumers and borrowers have yet to feel the effects of the free money given to banks. But they shouldn't be. Since the credit bust, it has generally been the case that those who least need cash can get it with great ease. Companies with AAA credit ratings can easily refinance their debt at very low rates. Wealthy people with lots of equity in their homes and high credit ratings can easily refinance. But lightening the debt load of the already well-off doesn't do much to spur demand. "That's why I call this a Republican monetary policy," said Brusca. "If you don't need the money you can get it. But if you have any credit problem, you can't get these low interest rates. We need to get the credit to the people who will use it."
In addition, Brusca argues that the Fed's policy of (a) setting short-term rates at rock-bottom levels and indicating that it will leave them for several years; and (b) driving long-term rates downward, has been counterproductive. First, banks aren't exactly eager to lend out money for 10 or 30 years at exceedingly low rates — they're assuming a decent amount of risk for very little reward. "Banks are rationing credit because the rates are so low," Brusca says. What's more, Brusca believes the persistence of low interest rates has a negative psychological effect. "The more you tell people that interest rates are going to be low for a really long period of time, the more they'll think that growth and inflation are going to be very low. And that causes people to pull back their expectations," he said.
Some analysts seized on the final line of the FOMC's communique as an indicator that the Fed might be willing to take more aggressive action soon. "The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability." But Brusca says we shouldn't hold our breath. "The Fed isn't in the business of creating jobs. All it can do is keep interest rates low."
At this point, the best hope for measures that could spur demand and boost jobs would come from fiscal policy. But Congress and the White House have been hopelessly deadlocked for the last few years. And it's unlikely that the months leading up to a pivotal election will bring any significant action to boost economic growth. Says Brusca: "They couldn't agree to tie their shoes if they were untied."
Daniel Gross is economics editor at Yahoo! Finance
Follow him on Twitter @grossdm; email him at email@example.com