It's best to think of the Federal Reserve today as a seventh-grade boy at a school dance, shuffling up to a girl, with all their friends watching. That music has a great beat, he says, and you sure do look like you enjoy dancing. She blinks expectantly. He opens his mouth. Then closes it, and walks away.
Their friends are baffled. The girl is baffled. The boy is, to put it mildly, baffling.
Why didn’t he ask her to dance?
Why didn’t the Federal Open Market Committee inject some new monetary stimulus into the faltering economy on Wednesday?
Markets — and more importantly, 13 million jobless Americans — are left to wonder.
The Fed has two mandates: Keep prices stable, and make sure there’s a job for everyone in the economy who wants one. By its own calculations, runaway prices aren’t a problem: The Fed estimates that inflation will run at or below its targets in the medium term.
Jobs, though, are a huge problem, and by the Fed’s reckoning, a growing one. Last month, the FOMC statement declared the economy “has been expanding moderately”; this month’s statement begins with the admission that “economic activity decelerated somewhat over the first half of this year.” For the Fed, that’s a meaningful change.
The FOMC also notes “significant downside risks” from Europe’s economic crisis, and that unemployment “will decline only slowly” toward the level the Fed is statutorily commanded to maintain.
The Fed does not see itself powerless to change that. Many Fed officials, including Chairman Ben Bernanke, believe that even with short-term interest rates essentially at zero, the central bank still has tools available to stimulate further growth and job creation.
Some of the officials, publicly and privately, spent the last month hinting that the Big Gun of those tools — a third round of so-called quantitative easing, which seeks to unleash growth by pushing down long-term interest rates via Fed purchases of Treasury bonds or mortgage-backed securities — was on its way soon. Possibly this month, possibly in September. Now, markets will bet on September.
You could look at that timing and ask, what’s another month? The delay will give the FOMC time to peruse two new jobs reports, and for Bernanke to build more support among any reluctant holdouts.
Problem is, if you believe that another round of easing will help boost growth, you should also believe that the Fed needed to roll it out months ago. Unemployment, in the Fed’s language, has remained “elevated” for several years now.
Bernanke has begged fiscal policy makers to act to boost growth, but they haven’t done much, and they almost certainly won’t do anything else until after the November election. It’s up to the Fed to do whatever it can to boost growth.
Perhaps there is an internal debate raging at the FOMC about whether another round of easing would really help much. Certainly, there are some board members who remain highly concerned about inflation threats that simply do not appear anywhere on the national economic radar. Maybe there are political considerations at play, such as worries of taking criticism from Republicans for easing so close to the economy-dominated presidential election.
Meanwhile, the girl stands quietly in the corner. Maybe next song? Maybe next month?
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