The Federal Reserve is failing to achieve both of its legally mandated goals, full employment and stable prices. And yet it chose on Wednesday to do the absolute least it could do to change that.
The Federal Open Market Committee, at the end of a two-day policy meeting, announced it was going to extend a bond-buying program known as "Operation Twist" for another six months. Under this program, the Fed sells short-term debt and buys long-term debt. The goal is to keep long-term interest rates low to help the economy. There is some debate about how much the program has really helped, but it is likely better than doing nothing.
But extending the program was only just barely more than doing nothing. Former Dallas Fed President Robert McTeer told CNBC that letting the Operation Twist program simply end as scheduled at the end of the month would have actually made monetary policy less easy. Today's move is simply running in place.
What's more, the Fed did not add mortgage-backed securities to its Operation Twist menu, which might have helped drive mortgage rates a little lower for home buyers or refinancing homeowners.
Nor did the Fed take the more radical step of just outright buying up more Treasury debt and/or mortgage bonds, known as "quantitative easing," to pump more cash into the economy. The Fed has taken that step two times in the years since it drove its traditional policy tool, the federal funds rate, down to zero. The funds rate is an overnight bank-lending rate that affects other borrowing costs throughout the economy.
Nor did the Fed promise to keep that fed funds rate "exceptionally low" any longer than "through at least late 2014," a promise it has been making for several months already.
The Fed basically did what the market expected it to do, but there's always hope on Wall Street that the Fed might do everybody a favor and spring a pleasant surprise. It didn't.
As a result, the stock market recoiled briefly before stabilizing. The Dow Jones Industrial Average briefly fell about 90 points, after being down by about 30 before the Fed statement. It temporarily climbed into positive territory, as traders started to look to a 2:15 p.m. EDT press conference by Fed Chairman Ben Bernanke, where they hoped he might offer some hint of further action.
Wall Street hopes also hung on this little line added to the Fed's policy statement after Wednesday's meeting: "The Committee is prepared to take further action," which suggests the Fed is getting closer to doing more.
Update: We live-blogged the press conference, at the bottom of this post. Executive summary: Bernanke didn't do much to promise further action. Maybe for this reason, the Dow dropped 90 points shortly after the press conference, nearly back to its worst levels of the day.
In fact, Bernanke said repeatedly during the press conference that today's move was "substantive." But he was on the defensive -- several reporters wondered why the Fed didn't do more.
Certainly the Fed's outlook on the economy would seem to dictate more action. The Fed is tasked with maintaining full employment and stable prices, and it admitted that neither of those two conditions are in place right now:
[T]he Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. ... The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
The Fed statement also name-checked a recent slowdown in hiring and consumer spending. The Wall Street Journal's handy tool that lets you compare Fed statements shows plainly how much the Fed's outlook has deteriorated since its previous policy meeting.
The way things are going, the Fed is going to have to act again -- especially if Congress continues to resist stimulating the economy, as Bernanke has all but begged it to do.
06/20/2012 3:03 PM EDT
Aaaand, That's A Wrap
The press conference is over. Boy, that was fairly content-free. Bernanke has become a master at playing it as close to the vest as possible.
The big takeaway here is that nobody is buying Bernanke's assertion that the Fed's move today, extending its "Operation Twist" program to swap short-term debt for long-term debt in an effort to bring long-term rates lower, is a "substantive" move.
Former Dallas Fed President Bob McTeer just told CNBC that, had the Fed let Operation Twist expire as planned at the end of this month, that would have been tightening monetary policy. This was essentially maintaining the status quo.
Everybody sees the too-high unemployment rate and too-low (theoretically, anyway) inflation and wonders why the Fed isn't doing more.
There may just be a disconnect between how the Fed sees the economy and how the market sees it.
06/20/2012 2:59 PM EDT
Care For Some Spanish Bonds?
The Fiscal Times asks about the Fed buying European sovereign debt.
Bernanke flatly denies the Fed will be doing that.
06/20/2012 2:59 PM EDT
What About The Banks?
A CNN/Money reporter asks about whether Operation Twist will hurt bank profits by lowering interest rates.
Bernanke disagrees with the premise, saying they're lowering the so-called "safe" interest rate -- i.e., Treasurys -- so banks will be encouraged to run out and lend to riskier credits to make more interest-rate spread.
06/20/2012 2:57 PM EDT
It's A Trap! Liquidity Edition
A Japanese reporter asks if the U.S. is stuck in a "liquidity trap" like Japan has been forever.
Bernanke says he knows all about liquidity traps and that the Fed can keep us out of it.
06/20/2012 2:56 PM EDT
Markets Not Pleased Again
The Dow industrials were recently down about 60 points, after earlier edging into positive territory. Traders aren't hearing the money helicopter getting warmed up, and that makes them sad.
06/20/2012 2:55 PM EDT
What's Wrong With Inflation?
Greg Ip of The Economist asks why the heck the Fed's inflation forecasts are so low.
Bernanke says there's a lot of uncertainty in Fed forecasts. Don't get a "false sense of precision" from them. Don't worry, Ben, we won't.
He says, though, that there's not enough stimulus in the economy to drive inflation higher. So why not do more now, then?
06/20/2012 2:52 PM EDT
Deep Thoughts On Europe
Bernanke is hoping for the best in Europe, but prepared for the worst. Deep.
06/20/2012 2:50 PM EDT
Jamie Dimon Makes An Appearance
An American Banker reporter asks about JPMorgan Chase's loss and the Volcker Rule. She wants to know if it's time to slow down rule making, as Jamie Dimon wants, or if it's time to slap a Volcker Rule on banks right away in light of JPMorgan's loss in credit derivatives?
Bernanke says the Volcker Rule has had 18,000 comment letters and involves five agencies, so will essentially never be implemented. Kidding. But it's going to be forever, basically.
Bernanke says one aspect of Volcker that would have helped in the JPMorgan situation is that the bank would have had to provide a plan, in advance, about how its trade was going to work. There would have been an auditing process to make sure the plan was followed and that there was adequate risk management for the trade. And the rule would have required that pay packages not incentivizing traders to gamble like retirees at Atlantic City.
06/20/2012 2:47 PM EDT
@ ezraklein :
Wonder if Ben Bernanke is wishing he hadn't instituted these quarterly press conferences right about now.
06/20/2012 2:46 PM EDT
Pick A Side, Bernanke!
A Market News International reporter wants Bernanke to say tax cuts are more awesome than government spending. Take a side, Bernanke!
Bernanke demurs, saying the dollar amount associated with tax-cut expirations in January is larger than the spending cuts -- "but I'm not making any judgment about individual programs." Altogether, the fiscal cliff is bad, he says.
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