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.
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.
The Fiscal Times asks about the Fed buying European sovereign debt.
Bernanke flatly denies the Fed will be doing that.
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.
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.
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.
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?
Bernanke is hoping for the best in Europe, but prepared for the worst. Deep.
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.
|@ ezraklein : Wonder if Ben Bernanke is wishing he hadn't instituted these quarterly press conferences right about now.|
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.
Somebody asks why the heck the government doesn't borrow more money, for longer terms, with interest rates so low.
Bernanke says the government is already trying to stretch out its borrowing for longer periods, which actually works against the Fed's efforts to push down long-term interest rates.
A McClatchy reporter says he's hearing companies are already cutting back on hiring and spending because of Europe and the fiscal cliff. He asks what Bernanke's hearing about why the economy feels so grim.
Bernanke agrees Europe is slowing U.S. economic growth. And the global economy is slowing down, too, he says, particularly in Asia, which is also hurting.
Two other things are still hurting the economy: Housing still stinks, though there are "some good signs."
And fiscal spending stinks, too -- federal, state and local -- we've been seeing "fiscal consolidation," with tight budgets leading to layoffs and canceling projects, he says. That is hurting the economy, as the NYT mentioned earlier.
HuffPost alumnus Shahien Nasiripour, now of the FT, asks about problems some people are having getting access to credit, which could mean the Fed isn't really helping the broad public.
Bernanke says it's not accurate to say Fed policy isn't helping the broad public. He says lots of people are taking advantage of low rates.
And the trickle down effects! Companies borrowing cheaply are more likely "to expand, add capital, add products" and will be "more likely to hire."
Peter Cook of Bloomberg TV asks how much it would help the economy if Congress kicked the fiscal can down the road.
Because that worked so well last year!
Bernanke says clarity would be helpful because nobody likes uncertainty. But he also thinks markets want a long-term fiscal path and that kicking the can might make people even more worried about "the seriousness of Congress." Too late!
Peter Barnes of Fox Business asks about the "fiscal cliff," the tax hikes and spending cuts looming at the end of the year, and whether that's already affecting the economy.
Bernanke says it's "still a bit early," though Bloomberg recently suggested it was already having an effect.
He says he heard anecdotes in today's Fed meeting about government contractors getting worried. He also said financial markets don't like uncertainty.
Bernanke again warns Congress not to monkey around with the fiscal cliff.
Kristina Peterson of Dow Jones asks about coordinating action with other central banks to stop Europe from killing us all forever.
Bernanke says Europe has "adequate resources" to address its problems and is committed to solving those problems. So no worries, then?
He says the Fed is always there to talk, if Europe just needs to blow off some steam.
Binyamin Appelbaum of the New York Times also asks the what-the-hell-why-aren't-you-doing more-Ben question.
Bernanke again argues today's move is "substantive." Nobody is really buying that, however.
Bloomberg asks whether this nightmare can go on and on for more than a decade or a dozen years, like the Depression.
Bernanke: "It's our intention to make sure it doesn't go on indefinitely."
He also says unemployment is too high, but it is going down. But just too slowly. And the Fed will do more if the job market doesn't get better.
Rates are already really low, the Financial Times asks. What good will the Fed's action today -- pushing longer-term interest rates lower -- do?
Bernanke effectively says long-term rates aren't completely at zero yet, so there's still plenty of room to move.
He also says that banks selling Treasury bonds to the Fed will then have cash they have to spend on, oh, I don't know, Facebook shares. Or crude oil. Or grain futures.
Somebody asks about Mitt Romney's claims that Fed bond buying -- QE1 and QE2 -- had no effect on the economy.
Bernanke disagrees. He admits the housing market didn't quite get sexed up as much as the Fed hoped, but he thinks QE2 stopped deflation dead.
He says the Fed is non-partisan and will ignore Romney and other politicians.
Jon Hilsenrath of the Wall Street Journal asks the question Ron Paul is asking: Why won't the Fed just stop acting? Hasn't it run out of tools?
Bernanke admits his policy isn't a panacea and "we welcome help and support from any other part of the government" -- HINT HINT CONGRESS.
But he says the Fed still does have some good ammunition in its arsenal.
Mark Felsenthal of Reuters asks the same question Liesman asks -- why isn't the Fed doing more?
Bernanke says there's been a great deal of news since the Fed's last meeting, and it's hard to tell how to read the data. So he wants to buy some time to see how the economy's going.
For the second time, he calls today's move "substantive." Okey-doke.
Liesman calls Fed policy "bold, and yet halting."
He asks whether the Fed was too incremental and made the economy underperform.
Bernanke begins a long history lesson about how they've been doing crazy stuff like bond purchases and what not. By their nature, "these tend to be lumpy," he says. Like oatmeal?
He says the Fed's massive balance sheet just keeps a steady stream of stimulus running into the economy.
And the outlook has changed, he says -- the Fed was too optimistic about the recovery, so they've had to add stimulus as it has changed. But has it changed because the Fed has been too slow? He doesn't say.
Ben Bernanke has stepped to the podium. He's wearing a smart gold tie, in honor of all the gold he's some day going to blow all over the place.
He's reading boilerplate about the Fed decision and its new projections. The Q&A is where all the real action (meaning no action) happens.
Just a few minutes ago, the Fed released the new projections of policy makers for the economy, inflation and interest rates.
They've nudged their forecasts down just a bit, but not all that much. Helps explain their fairly weak action today.
"These changes definitely mean that the Fed is taking the slowdown seriously but they are not concerned about a return to recession," says Standard Chartered economist David Semmens.
Welcome, one and all, to the HuffPost live blog of Fed Chairman Ben Bernanke's press conference, following the Fed's weak-tea policy action earlier today.
We'll follow all of the thrills you've come to expect from a Fed press conference.