Here’s why you should care about the Federal Reserve’s latest round of bond-buying, announced Thursday by the central bank: One man has assumed the task of getting the flagging U.S. economy back on track. He says he’ll work for as long as it takes, all by himself if he has to. And he isn’t even an elected official.
Chairman Ben Bernanke’s decision to make $40 billion in monthly asset purchases until the jobs market recovers marks a dramatic change of course for the Fed, which in the past has limited monetary stimulus to set periods of time. The pace of new bond-buying — or quantitative easing, as it’s technically termed — will lag behind that of similar action taken in the wake of the 2008 financial crisis, but the commitment is completely open-ended.
“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” reads the statement from the Federal Open Market Committee. Translation: The central bank is done with temporary measures. It’s going to see this through until the job market is fully recovered and then some.
That could be a while. “There’s not a specific number we have in mind, but we see the last six months isn’t it,” Bernanke said at an afternoon press conference in Washington, in which he conceded the Fed alone lacks “tools that are strong enough to solve the unemployment problem.”
The current state of the U.S. economy is blah. The Federal Reserve’s new projections can be found here, but to sum up: Inflation is in check; growth is happening, but barely; unemployment is coming down, but many people are still out of the workforce. There’s been no fiscal pump-priming enacted by Congress since the end of 2010 and major tax hikes and spending cuts, part of last summer’s debt ceiling deal, loom in January if Congress doesn’t act. That dysfunction is part of the reason Bernanke has taken the job all on himself. (“We’re looking for policymakers in other areas to do their part,” he lamented at his press conference.)
So what does all this mean for President Obama’s reelection chances? Probably not much. Despite an unsatisfactory status quo, the state of the economy probably hasn’t disqualified him in the minds of most voters. If anything, minor progress over the past year is the reason he’s slightly ahead of Mitt Romney in the polls. Monetary stimulus can help through the power of expectations–data suggest that voters who pay more attention to the news have a sunnier view of the economy and the stock market is over the moon at the Fed’s announcement–but it’s unlikely to jolt the recovery out of lethargy in the next few weeks.
If anything, the more politically meaningful recent economic news came out of Europe, where the continent’s central bank announced its own bond-buying program last week and Germany’s high court approved the European bailout fund on Wednesday. Upshot: A European financial crisis, one of the few cataclysmic events that could seriously damage Obama, is now much less likely to erupt before Election Day.
That doesn’t mean the Fed’s announcement isn’t a political event. Many Republicans had previously spoken out against any Fed action, and they may accuse Bernanke of trying to swing the election for the man who reappointed him; such critiques seem hollow, however, because Fed action in election years is very common and many of those leveling this charge believe monetary easing hurts the economy rather than helps it.
While Romney’s monetary views remain largely opaque, his campaign’s response to Thursday’s announcement hews toward the latter point. “The American economy doesn’t need more artificial and ineffective measures,” the statement reads. “We should be creating wealth, not printing dollars.” Of course, should he be elected, Romney won’t be able to set monetary policy. That power will still be Bernanke’s, whose term does not end until January 2014. Until then, it’s Bernanke’s show.