The Federal Reserve Board of Governors opted again to do nothing after their two-day meeting, remaining pat despite clear evidence of a slowing in the economy and a miss on their two mandates, on maintaining full employment and price stability.
This post is going to read like a re-run, because we’ve seen this several times before. The Fed indicates in their statement that the economy has “decelerated somewhat” since their last meeting in June, with slow employment growth, an elevated unemployment rate, slower growth in household spending, a housing sector that “remains depressed,” and a lower inflation rate.
This is a description of an economy in chaos. If you were air-dropped into America from a planet that had sound economic understanding, you would know that this is a catastrophic situation requiring major intervention from policymakers.
And while the standard techniques of monetary policy, including the blunt instrument of the federal funds rate, are currently restrained by the zero lower bound, there are actions the Fed could take, including entering the municipal bond market and reducing borrowing costs for local government to reduce the bleeding in budget cutbacks, or purchasing mortgages directly and clearing the middlemen to get those low interest rates directly into the hands of homeowners who need them. That’s not even getting to the idea of communicating a higher inflation target or other options.
But the Fed did nothing. Even though their outlook showed only slow growth in coming years, and only modest improvement in employment, even though they acknowledged downside risks from Europe and other market turmoil, even though they admitted that “inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate,” they only maintained the status quo monetary policy that has brought us to this point. The FOMC plans to keep its federal funds rate at virtually zero through the end of 2014, and continue “operation twist” through the end of the year, as it announced in June. As for anything else, you can chew on this and see if it will give you nutrition:
The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
That’s all you get. Best of luck, courtesy your friendly neighborhood failed policy institution.