The Federal Reserve meets later this month to determine the course of monetary policy. A couple months ago, you could have expected them to stay pat, to allow what was seen as a nascent recovery continue without tightening monetary accommodation or adding a boost. If anything they would have tightened by default, by wrapping up “Operation Twist,” the process of orienting its portfolio toward longer-term securities. Operation Twist was due to wrap up at the end of June. But that was before a troubling set of data that has increased talk of renewed Fed action:
Friday’s employment report, which found the economy added just 69,000 jobs — under half of what was expected — suggested that an already tenuous economic recovery might have lost steam.
With the Fed officially charged with maximizing employment and controlling inflation, those bleak numbers have analysts and lawmakers wondering if the central bank will act to jolt the economy.
“That’s the chatter,” said Andrew Busch of BMO Capital Markets. “At this point, they may be reassessing their outlook.”
The pressure heightened today when the Financial Times called for Fed action.
First, and most immediately, Ben Bernanke could reverse the hawkish drift at the Federal Reserve and announce a third round of quantitative easing at the next Federal Open Market Committee meeting, later this month. Pessimists have been forecasting runaway inflation since the start of the financial crisis in 2008. Clearly the markets do not agree. US Treasury yields continue to plummet – last week the 10-year bond hit a record low of 1.45 per cent. It is obviously impossible for the Fed to cut its discount rate to below zero. But if things deteriorate further, it could double its inflation target to 4 per cent.
FT does not assume that fiscal policy plays no role here. In fact, they state clearly that fiscal policy is currently dragging on US growth, at a time when the bond markets are begging for more borrowing, offering the lure of negative real interest rates. They also say that the looming fiscal cliff is dragging down growth prospects by increasing uncertainty (though I usually discount the uncertainty argument, in this case it’s a strong one; the idea that the Congress would risk a 4% hit to GDP through gridlock is appallingly likely). Basically they want Congress to do their job, and use counter-cyclical fiscal policy to increase overall demand.
But the Fed has the primary role, and because of obvious political factors, the only role that has a chance to work in the near term. The Federal Reserve has failed badly, joining other central bank failures during the aftermath of the financial crisis. They have consistently undershot their targets for inflation and employment, the only priorities they have. They have made 2% inflation a ceiling rather than a target that you can overshoot as well as undershoot. Ben Bernanke knows what to do – his work on the aftermath of Japan’s lost decade shows that. He understands that there are policy options for the Fed, even at the zero lower bound of interest rates. Most of them involve the expectations channel, to encourage higher inflation:
The Fed’s interventions have been limited and seemingly designed to ignore the powerful expectations channel; at no point have breakevens shown inflation expectations steady at even pre-crisis levels when expectations above pre-crisis levels are what the current situation demands. Despite the obvious importance of inflation expectations for recovery at the ZLB, the Fed has behaved as if it’s operating under a 2% inflation ceiling, rather than a target. It repeatedly stops pushing the economy forward as soon as it seems likely that the economic trajectory will carry inflation toward 2%. With plenty of slack remaining in the American economy, this strategy inevitably produces a return to disinflation at the slightest breath of trouble from abroad.
We know that this can work because Republicans are issuing warnings for the Fed to hold their fire. From the Hill article:
Republicans worry the Fed might read the report as a call to action.
“One of my fears is that the Fed feels an obligation to interject itself more into the economy, which I think is exactly the wrong thing,” said Rep. Kevin Brady (R-Texas), vice chairman of that panel. “I’m hopeful they don’t take this as a signal to intervene more.”
“I’m always concerned about what the Fed may do,” said Rep. Scott Garrett (R-N.J.). “They have, in my opinion, gone beyond their bounds.”
They obviously have a vested interest in stopping the Fed from acting. Add in the looming election and the still-palpable fear central bankers have of offending their peer group by expressing a higher inflation target, and the prospects for legitimate Fed action, on a level of expectations, are sadly remote.




31 Comments

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I think your analysis is spot-on although I would call this certainty, not uncertainty.
We all know that the reason corporations stock pile cash is because they see little demand for their products and almost no inflation in the future. Why buy an asset today if you can buy it for the same price in the future. Corporation actions have shown that they are very “certain” the future shows little or no inflation. We may not agree with their policies or believe anything they say but they are usually pretty smart when it comes to investing their own money.
How can a Fed action stimulate demand? the Fed can pump more money into the Banks, but Banks are lenders, it may be that Banks will try to lend to consumers (at Credit Card interest rates), and use the balance of the money to “trade on their own account” (aka: Gambling).
Buying up a bunch of mortgages or credit card debt and then declaring them paid in full would be one hell of a stimulus (Pigs might fly, too). Although it would still inject the money into the Banking system (see Gambling above).
I swear sometimes I think there are two david’s. The one david who knows it is all a big con job and we the people are being lied to, raped, and robbed. The other David who asks these psychos to start doing more of the same because I guess we were just not raped hard enough and we still have a few assets left to rob.
Oh yeh and no inflation, LOL. Must be my imagination at the grocery store. Ben knows what he is doing, ROFLOL. Yep he does read all his pithy quotes before the housing market imploded, he sure saw it coming, not. But no worries let’s keep him in charge and encourage him to keep destroying most of our lives so long as his owners reap all the benefits
not sure what the fed can do, when unemployment is high or there is low wage pressure they lower lending rates
money now is virtually free so lowering rates won’t do anything here
the only thing I see as happening is to begin giving money for public projects at zero interest, the private sector is simply not spending their money so what is left is public sector
but the president himself lobies against public sector jobs so this ain’t gonna happen
the way the fed “pumps money into banks” is by lowering the prime, it’s already so low lowering it more won’t do anything
what needs to be done is the government needs to start making direct loans to people at zero rate, or begin hiring people at high wage, but that ain’t gonna happen with obama at the wheel
Off topic, but I just wanted to remind y’all that there’s no better, cheaper, faster or more efficient way to speak out – about whatever you want – than putting signs on freeways.
http://freewayblogger.blogspot.com/2012/06/san-franciscoberkeley.html
Over 400 posted since Jan. 1st, not even a word from the authorities.
Loans to people may not help. People are do not need more individual debt repayment.
You are making my point. I perceive little the Fed can do.
We’ve had 0% short term rates for more than 3 years. We have record low long term rates, thanks to “Twist” and the “safe haven” (for the moment) factor. Oh, and the Fed has printed $3 trillion.
And it hasn’t worked. So why do people want more of the same? It’s the American Way. If 50,000 troops can’t “win” in Afghanistan, we’ll send in 100,000. Same old, same old.
The Fed is caught in a liquidity trap of its own making. Sorry folks, the Fed has used up its ammo. Thinking they can pull our asses out of the fire is childish nonsense. They created the problem with too much easy credit. More of the same won’t help.
Saw the ecopocalypse now sign recently and wondered if it meant economic apocalypse or ecological apocalypse. Then I decided it must deliberately mean both/either.
If adding zeros to the currency unit created prosperity, Zimbabwe would be the richest nation on earth today.
We need jobs. Lots of them. And with hundreds of billions in infrastructure work needed to be done, and almost zero percent money available, this ain’t hard, people.
And these GOP a-holes need to be called out politically for blocking it.
“We all know” is a fallacy, especially considering that your specific reasoning there is fallacious in and of itself. Corporations are hoarding cash because Bernanke and Obama and the Congress have decimated trust in the system.
I will give an alternative explanation that makes a lot more sense to people actually working in finance: no one has any trust anymore that they’ll be able to get a loan if they need it, so the only option corporations have is to save up money for rainy days. This is the direct result of wide scale accounting fraud that is endorsed by the Fed and Obama government.
The FRB’s out of bullets; there’s nothing they can do about the economy. QEs were a joke, as is any operation twist.
Monetary policy stimulates demand for the same reason rising stock prices do: bc consumers view them as signals that something is being done. That is, they change consumer expectations toward a more optimistic view. I did some surveying with U.Mich back in the 90s which provided the evidence.
Anything more subtle that the FRB does is useless for stimulating demand.
Meanwhile zero interest rates are GRRREAT for bubbles and crashes. So that’s what the FRB has done to the economy.
Where was it? LA, SF, Seattle, Portland? somewhere else?
I would personally open a business if I could get a loan without collateral
What eCAHNomics said.
Fed merely controls interest rates, which are already as low as they can go.
Fed does not control inflation, except to the extent that interest rates influence inflation (debatable). The Fed has no way to “turn up” inflation, even if it wanted to.
QE is disinflationary for Main Street because it removes billions in interest income from the economy.
Zero interest rates give investors an incentive to move out of safe government bonds and into stocks, commodities, and derivatives. This drives up the price of stocks so the 1% get richer. Until recently, it was driving up the price of commodities so you and I had to pay more for food and gas. The move to riskier investments may result in a financial bubble that eventually crashes.
David Dayen, I enjoy many of your posts, but you lose me with your Milt Friedman-like assumptions about economics. Please educate yourself on MMT economics instead.
http://moslereconomics.com/mandatory-readings/
Most people don’t follow these things that closely. But they aren’t stupid.
if these politicians and their media lackeys could summon up some courage, and think of something other than themselves, do something that will do some good……. and you don’t have to be a genius to know what some of those things are,
(as is shown by the results of poll after poll that are published at this site)
the citizens will gain some confidence in the future.
till then, why should they?
They’re not stupid.
actually, the fed does control what they “call” “wage inflation”, it’s the reason we are more productive yet making less
when there is little or no wage pressure they lower the prime, that’s the metric they use, when there people are asking for and getting pay increase they raise the prime
that’s the metric, no kidding
whenever you hear the fed say “the economy is heating up we have to raise rates” what they really mean is “people are asking for a raise and getting it”
whenever you hear the fed say “the economy is stable and we can lower rates” what they mean is it’s hard to get a raise
sick but true, thank greenspan for that brilliant metric
not buying that
I believe they aren’t lending because they don’t want to lend, big interests that have very high risk are getting loans, small interests are not.
for instance they deliberately with held loans to gm to break unions
this looks entirely orchestrated to me, if the government started making loans themselves the banks would make them because they wouldn’t want to lose the money made on interest
You’re right. When I said “We all know” I meant people that understand micro economics, not everyone in general.
yes this is orchestrated!
first law of war SUN TZU
Know Thyself and Know Thy Enemies
Is Obama really this STUPID?
“Keep in mind Clinton gave us NAFTA”
the elites are always looking and seeking ways to kill the poor.
the MSM thru out the years have been screaming from the mountain tops that UNIONS are bad? really? what other voice does workers have?
keep in mind the FED gave USA banks 16 trillion
http://www.unelected.org/audit-of-the-federal-reserve-reveals-16-trillion-in-secret-bailouts
Yes! the people on Wall Street are not that smart either. they just own the USA Govt.
Obama is still seeking to do trade deals that will send more USA jobs overseas.
However, the OBAMA experiment may end very badly, because Obama incites pure rage from the Left and Right
Obama the 1st black president is seeking to undo the work of FDR, JFK, MLK, LBJ, etc.
How will the american people respond when OBAMA cuts Social Security, Medicare, Medicade? not good!
the only good news coming out of DC, is the rage that the current WH is creating from Left and Right
We all know Obama saved the GOP, Obama also woke up Progressives and Liberals
I repeat the elites are going to regret putting Obama in the WH
Understanding micro economics is relative. Many economists believe they understand micro economics for example, although when you examine their understanding rationally you can only come to the conclusion that they are snake oil salesmen who’ve managed to delude themselves with their own pseudo scientific ideology.
You can believe what you like to believe, but liquidity freezes happen when accounting fraud becomes the accepted norm, as it is in America today. People working in finance today have the implicitly that everyone they are doing business with is not just permitted, but expected, to lie about their financial situation. This creates an environment where no one is happy about lending money to anyone else, and thus forces everyone to hoard cash–which is the situation we are in today.
we each can have our own respective beliefs
to demonstrate my “belief” is actually the fact at hand, this is right now on c and elle, this “lack of private sector money” was AFTER we gave banks money SPECIFICALLY for these loans, there is no dancing around these facts;
this lack of lending is orchestrated plain and simple
perris I agree with you!
we are talking about the same banks that got a 16 trillion dollar bailout from the FED.
the only way out of the current Depression is VIA massive Govt. spending on infrastruture etc. it is not that complicated
however, we have a group of Atlas Shrugg Morons trying to drive wages down
the EU is becoming the German Empire
the elites in the USA are seeking to become a bad third world nation, where everyone has a gun! back to wild wild west we go!
being rich, but being un-able to leave your house, is a lot like JAIL
GM going BK would in fact point to them being a bad credit risk.
They can make it look like something is being done.
I worked in finance, and your explanation makes no sense. Fraud has been around a lot longer than double-entry bookkeeping. Far longer (read Cicero, de officiis). Interest is the mechanism of risk assumption: the riskier the prospect, the higher the interest. But if there is future value, the loan is made, even by ARMs to unqualified borrowers, as was widespread during the Bush administration. Besides, for a corporation to be cash-rich, they are still investing that money in markets to be efficient to any degree. Bond or money market or commercial paper, the interest they accrue from it is translated risk, and short-term instruments are subject to accountancy fraud as is any other vehicle, if abject fraud is the standard. If there was any future value to a capital outlay, they would do it. But there’s no demand forecast; therefore, they will not plow that money into any expansion or improvement.But to admit that customers are the job-creators and not the idle rich sitting on their bags of money is sacrilege, so the myth endures. And the economy flounders.
Monetary easing is not about helping the economy .The keystroked money traverses through a wholesale loop to benefit the international capital markets and giant multinationals .This welfare liquidity creates asset bubbles by artificially inflating valuations,which in turn makes consumers spend more as they see their portfolios bloat with fool’s gold known as the ‘ wealth effect ” .