This list of the possible actions the Fed might take while Congress does nothing sound pretty weak. Here’s the first one:
One pro-growth strategy would be to strengthen language in Fed policy statements that the central bank’s interest rate target is likely to remain “exceptionally low” for an “extended period.” The policymakers could change that wording to effectively commit to keeping rates near zero for even longer than investors now expect, perhaps adding specifics about which economic conditions would lead them to raise rates.
That’s a bit better than a strongly-worded letter, but with rates at .25 percent, the Fed doesn’t have a lot of other options.
Bankers never learn from experience, only from inflicting the most massive pain they can upon society at large and having the society rise up either by legislation or revolt.
It isn’t like they didn’t have the recent model of Japan to go by.
Here’s what I got out of that article: Right now, the Fed has about as much power to kick-start the economy as BP does to plug that friggin’ well…
So long as Bernanke resists de-anchoring inflation expectations, the Fed will do very little to curb unemployment. That is probably, to use a military analogy, the biggest gun in their arsenal and they absolutely refuse to use it.
c u n d gulag
Jesus, DON’T just do something. STAND THERE!!!</strong>
the Fed doesn’t have a lot of other options.
It could buy a bunch of federal bonds, saving the UST a some of cash. It could buy a bunch state and local bonds, which would push rates down. It could even buy a bunch of yuan with fresh, crispy benjamins in order to push the value of the yuan up and the dollar down (though that would create a epic international shitstorm).
There are plenty of things the Fed could do, but because it is being run by a Republican, and because it inherently favors the owners of loans (the banks), it won’t do any of them.
Yeah, that was my thought, also, too, when I started reading this article. Didn’t bother to finish it.
I assume it was inadvertent, but the tone of your piece suggests that you think the Fed is to blame for its own impotence. Surely you know better than that.
That’s a pretty goddamned weak strategy. It’s going to do nothing to reassure those morons who assume higher rates of inflation are just around the corner because they’ll be all “Yeah, but can you tighten the fiscal strings? No? QED.” When their logic doesn’t make any sense to begin with, you can’t expect to appease them.
And yet the Fed is still spooked by these morons…
God fucking damnit, that is not the bloody trend. There’s plenty of breathing room, Fed.
Link to chart I can’t get working in HTML for some reason: fuck it, it won’t work. Use your imagination: 10-year bonds at a relative high of 4% around April, then dropping like a rock since.
@Sentient Puddle: How about this chart?
@PeakVT: Thanks. That’s what I wanted to show.
From the same WaPo article:
So. What, exactly, does it fucking take to make these guys treat our economic crisis as already here – which means, you know, beyond imminent?
Sounds pretty ‘magicky’ to me.
Although, if they can just use stronger language to make a change, how about going whole hog?
‘We have increased the money supply to the point of re-kindling inflation, over stimulating the economy with GDP growth to 8% thereby getting unemployment back to 6%. With new expectations of things getting overheated we plan to hire Volcker, Jr to squeeze inflation out now as soon as the economic data confirms we are at full employment.”
But wait! Are all the banker’s Beamer leases paid off yet? We can’t get to full employment on the backs of Beamer dealers having to repossess their cars. Then they would have to walk past or even join the unemployment lines. Oh noes!
Actually, the Fed could do a lot, it just appears to be sort of ideologically / philosophically blinkered. This is actually a big debate in the econ blogosphere. See Scott Sumner and Nick Rowe who seem to talk about nothing else, and Mark Thoma talks about it frequently.
As a really simple example, the Fed could just effectively finance a stimulus package with newly printed money – a permanent expansion of the money supply. This would (1) immediately give relief to people without increasing the deficit at all (2) raise inflation expectations, which is actually a good thing at the moment because it raises the cost of keeping savings in cash. As the NY Times reported this week, a lot of US companies are stock piling cash instead of investing in real assets; if they knew they would lose value keeping their savings in cash, then investing in new assets becomes more attractive – and somebody has to be employed making those assets.
The problem is that the Fed doesn’t appear to believe a change in inflation expectations is a good thing – it’s putting price stability over unemployment.
Look at the monetary base. Its high. The FOMC controls the Fed Funds rate. Its already basically at the zero bound. The Discount Window too. In terms of “printing money” I’m not sure there is much the Fed can do in that regard.
That is one reason the Fed got creative and bought up a bunch of crap assets to free banks from their burden and replaced it with cash the banks could then lend out. The Fed could in theory do more of this, but I don’t think “buying up crap from the banks and letting the banks off the hook for the losses” is really what people want to hear.
One thing they could do is stop paying interest on excess reserves. This gives banks the incentive to keep cash in the vaults rather than lend it out. I actually don’t know how much excess reserves banks are holding though. Plus, I recently spoke with someone who plays a major role in all of this and he implies that the interest on excess reserves was an edict from congress, but I may have misunderstood him.
Besides that, all they can do is use their soapbox to talk tough to congress or use strong language to convince people that they really will commit to higher inflation in the future.
In short, give the banks more of a bailout or write letters/give speeches are really their best options.
Plus, they really did massively expand the monetary base. That just hasn’t translated to an expansion of the broader money supply because the velocity of money is quite low right now (and the Fed doesn’t control that…no one does directly). Should the velocity of money return to normal, the money supply might shoot through the roof, and with a quickness. I am no inflation hawk by any means, but once velocity picks up, the Fed is going to have to cut back the base with a quickness lest things get out of control very fast.
If someone has a link for what the fed can do, I’m all ears.
The thing is, nominal interest rates don’t matter – what matters is the real interest rate, the nominal rate modified by inflationary expectations. At the moment, despite the expansion in the monetary base, inflationary expectations remain low. This means that the real interest rate is still too high – the some estimates using the taylor rule suggest that the interest rate now should be -5%, meaning we need inflation expectations at that level before 0% nominal interest actually is ‘lose’ instead of ‘tight’ money.
Part of the reason that the expansion in the monetary base is a bit of a illusion is that it is not seen as permanent – from the very start of the Fed’s ‘quantitative easing’ program the Fed has been talking about how it would get rid of the expansion without causing inflation. This is actually a bad thing – monetary policy in a liquidity trap is much less effective if inflationary expectations cannot be changed.
Because the expansion is not permanent, the Fed has not actually been pursuing Bernanke’s helicopter strategy in which he explicitly said that the Fed can do more after it reaches the zero-bound. The Fed has not actually been undertaking ‘quantitative easing’, it has been undertaking ‘credit easing’ which aims to temporarily alter the relative term and risk premia of different assets rather than change the price level.
Also, the expansion in the monetary base has gone almost entirely to banks’ reserves; you want this graph to complement your graph of the monetary base.
Some links: Scott Sumner is a big advocate of further monetary action; but Krugman sort of started the most recent research cycle on inflationary expectations in a liquidity trap – he just seems to think that politically the Fed will not commit to raising inflationary expectations and so fiscal policy is a realistic second-best option.