What is the Fed doing? Ben Bernanke attempts to communicate the Fed’s policy and the reasoning behind it:
What the Fed did and why: supporting the recovery and sustaining price stability, by Ben S. Bernanke, Commentary, Washington Post: …The Federal Reserve’s objectives – its dual mandate, set by Congress – are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.
Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. …
The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August.
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. …
While they have been used successfully in the United States and elsewhere, purchases of longer-term securities are a less familiar monetary policy tool than cutting short-term interest rates. That is one reason the FOMC has been cautious, balancing the costs and benefits before acting. We will review the purchase program regularly to ensure it is working as intended and to assess whether adjustments are needed as economic conditions change.
Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.
Our earlier use of this policy approach had little effect on … broad measures of the money supply… Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.
The Federal Reserve cannot solve all the economy’s problems on its own. That will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector. But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.
The purchase should have been much larger, and it should have involved longer term Treasury securities (the plan is for 5 to 6 year bonds). The language in the Press Release about maintaining stable expectations was also disappointing to those who have ben advocating a higher inflation target. This is not, by any means, a bold plan.
That’s unlikely to change. Even if the economy continues to struggle, it’s hard to imagine the Fed doing anything more than moving at a “measured pace,” a pace too slow to do much except chip away at the margins.
With fiscal policy out the window and a timid, tip-toeing Fed, we’re likely headed for an agonizingly slow recovery.
Originally published at Economist’s View and reproduced here with the author’s permission.
25 Responses to “Bernanke: What the Fed Did and Why”
Sometimes, blogging is a bit tiresome specially if you need to update more topics.`”,*”
You are so cool man, the post on your blogs are super great.,,’:,
You seem to be very professional in the way you write.*”*-:
The color of your blog is quite great. i would love to have those colors too on my blog.,`;*”
Well, another blogger already posted a topic like this.”~;;’
A blog like yours should be earning much money from adsense.*”"‘*
I just added your RSS Feed on my RSS reader, it is so nice to read your blog.~*..’
Your blog has the same post as another author but i like your better.:;’.;
Great blog post and nice discussion among the comments.;:~’”
You can increase your blog visitors by having a fan page on facebook..::-,
I will invite all my friends to your blog, you really got a great blog.”.”‘-
I always visit your blog everyday to read new topics.`:.-;
Great blog post and nice discussion among the comments.’;~,~
I just put the link of your blog on my Facebook Wall. very nice blog indeed..`-~~
I’m a blog crazed person and i love to read cool blog like yours.”~;,,
Sometimes your blog is loading slowly, better find a better host.”:`-’
There are actually numerous details like that to take into consideration. That could be a great level to convey up. I provide the thoughts above as normal inspiration but clearly there are questions like the one you bring up where an important factor will probably be working in honest good faith. I don?t know if finest practices have emerged around things like that, however I am sure that your job is clearly identified as a good game. Both girls and boys really feel the impact of only a second’s pleasure, for the remainder of their lives.
Hey, what kind of anti-spam plugin do you use for your blog.-,*`;
I really love the way you discuss this kind of topic.~:;”*
Perhaps you should also a put a forum site on your blog to increase reader interaction.’;.’;
You seem to be very professional in the way you write.’~:,.
The color of your blog is quite great. i would love to have those colors too on my blog..*;’,
I’m new to your blog and i really appreciate the nice posts and great layout.*-”:-
You seem to be very professional in the way you write.;*”":
Very well said, your blog says it all about that particular topic..`:;`