THE FED WANTS TO SIT ON ITS HANDS…. When considering the Federal Reserve’s principal goals, the obvious focus is on preventing inflation. It’s easy to forget that the Fed is also required to pursue full employment — which would put the national unemployment rate at 4% (as opposed to around 10%, which is where the rate stands now).
It’s so easy to forget, in fact, that the Fed itself seems to be paying no attention at all to this part of its mandate. Two weeks ago, with confidence in an economic recovery fading, the Fed agreed to “use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities,” which was, quite literally, the least it could do. In effect, the move was an effort to maintain the status quo, not helping the economy grow and not letting it contract.
The Wall Street Journal reports today, however, that even getting the Fed to agree to this exceedingly modest step was like pulling teeth — suggesting more meaningful steps from the Federal Reserve are off the table entirely. (via Kevin Drum)
The Aug. 10 meeting of top Federal Reserve officials was among the most contentious in Ben Bernanke’s four-and-a-half year tenure as central bank chairman.
With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.
But it had big implications: Doing so would plunge the Fed back into the markets and might be a prelude to a future easing of monetary policy, moves that divided the men and women atop the central bank.
At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.
The debate over the decision to keep the Fed’s $2.05 trillion stock of mortgage debt and U.S. Treasury holdings from shrinking, described in interviews with several participants, set the stage for a more consequential discussion inside the Fed that remains very much alive: what to do next, if anything, about America’s stubbornly weak recovery and troublingly low inflation.
In all, of the 17 Fed officials at the meeting, no more than a few voiced support for intervening to improve economic conditions. Even if President Obama’s nominees weren’t stuck in the Senate, waiting for confirmation, most of the Fed just doesn’t want to act.
So, what are we left with? An economy that’s struggling badly, a political process paralyzed by Republicans who refuse to allow votes on meaningful economic legislation, a Fed content to sit on its hands, and voters who’ve been led to believe government spending is “bad.”
