The Fed’s Impotence Would Be Funny If It Weren’t So Tragic

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Chairman of Federal Reserve Board Ben Bernanke listens during the open session of the Financial Stability Oversight Council (FSOC) meeting July 18, 2011 at the Treasury Department in Washington, D.C.

Persistent unemployment is tragic, not funny.

The Federal Reserve is boring, not funny.

The Fed’s impotence in the face of persistent unemployment is scary, not funny.

But the newsy statement from the Fed’s meeting on Wednesday, while full of the usual eyes-glaze-over econo-jargon about “investment in non-residential structures” and “low rates of resource utilization,” is actually kind of funny. Chairman Ben Bernanke and his zany pals on the Fed board have come up with their most creative way yet to say that the economy sucks and they still don’t want to do anything about it. But oh, one of these days, they really, really, might. One more “deterioration of labor market conditions,” Alice, and pow! Straight to the moon!

The news from the statement is that the Fed, which had already lowered its key interest rate as low as it can go, and had already been saying the rate would stay there “for an extended period,” has now declared that the rate is likely to stay there “at least through mid-2013,” because it now expects even slower growth than it was expecting before. This is a way of signaling to markets that the Fed has no intention of tightening its policy while the recovery is stalled, regardless of the consistently wrong warnings of the inflation hawks on its board. Three hawks actually dissented from the statement, saying they preferred the “extended period” language, which was also funny, because until now hawks have been criticizing the “extended period language,” insisting that the economy was well on its way to recovery.

Well, maybe it’s not really ha-ha funny. We’ve apparently reached the stage where our economic car is slowing to a crawl and the Fed won’t give it gas, but we’re supposed to feel better because it’s promising not to slam on the brakes before 2013. How is that going to convince anyone to start hiring?

Anyway, the really distressing passage is in the second paragraph. First the board reminds its faithful readers of its “dual mandate” to maximize employment and keep prices stable. Then it acknowledges that given the slowdown, it expects that the unemployment rate “will decline only gradually” towards the board’s target. Then it acknowledges that that it expects the inflation rate to settle at levels at or below the board’s target. In other words, it admits it’s failing at both ends of its mandate.

Fortunately, the usual policy response for unemployment rates that are too high happens to be the same response for inflation rates that are too low: Fire up the printing presses! Step on the gas! Let’s get this party started! Unfortunately, the Fed didn’t do that. It merely “discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.” OK, then. If discussing a range of policy tools doesn’t get America back to work, I don’t know what will.

In fairness, the Fed has fired plenty of bullets over the last few years, lowering its rates to zero, then throwing money at anyone registered as an LLC during the financial crisis, then further blowing up its balance sheet with two rounds of “quantitative easing.” Bernanke fired so many bullets, we made him Person of the Year, and I wrote a profile describing him as a kind of macroeconomic Rambo. And after firing all those bullets, Bernanke was quite clear (at least as clear as a Fed chairman can be) that he didn’t want to fire any more.

But as a Princeton academic named Ben Bernanke once wrote in an article criticizing Japan, central banks have lots and lots of bullets. The Fed isn’t necessarily out of ammo. It could stop paying interest rates on reserves, to give banks more of an incentive to lend. It could try a big honking QE3. It could call for a higher inflation rate, which could encourage more consumer spending and business investment—and yes, could help reduce that federal debt that is allegedly our biggest problem.

The debt is not our biggest problem. Persistent unemployment is our biggest problem. (For one thing, it increases the debt; idle workers don’t pay taxes.) Just as the Fed pulled out all the stops to whip inflation thirty years ago, it ought to pull out all the stops to whip unemployment now.  President Obama ought to appoint dovish governors to fill the two vacancies on the Fed board, to reduce the influence of the goofballs who keep assuring us inflation is right around the corner. And Bernanke ought to do everything in his power to help get the economy to escape velocity.

My suspicion is that Bernanke doesn’t think monetary stimulus would help all that much in the current situation, and he’d prefer not to reveal his impotence by firing blanks. Even a massive QE3 would just dump lots of money on already-liquid banks at a time when they’re reluctant to lend and businesses are reluctant to borrow. By contrast, fiscal stimulus through congressional tax cuts or spending increases could get money sloshing around the economy directly, boosting demand and creating jobs.

Too bad our political system has gone nuts. The debate has shifted entirely to Hoover-style austerity and anti-stimulus, and Bernanke has mildly suggested that Congress shouldn’t make the situation worse with overly aggressive short-term spending cuts. But if he’s really concluded that he can’t do anything to make the situation better, he ought to be screaming from the rooftops for Congress to do something.

Or he can keep hinting that if things don’t get better, and the sluggish economy keeps productive workers idle, then next, time, pow! Right in the kisser! Until next time, the situation isn’t funny. It’s sad.

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