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What can the Fed do to help recovery?

The U.S. Federal Reserve Building in Washington, D.C.

TEXT OF STORY

Kai Ryssdal:As consumers keep on trying to figure out how they feel about things -- a topic we'll get to in a minute -- policymakers in Washington are trying to do the same. Keep on giving the economy a kick in the pants, or pull back and get the deficit under control? And when I say policymakers here, by the way, what I'm really talking about is the Federal Reserve.

Our Washington bureau chief John Dimsdale has the story.


John Dimsdale: The Fed dropped interest rates on short-term bank loans to virtually zero nearly two years ago, and they've kept rates there ever since. After each meeting, Fed members promise their loose monetary policy will remain for the foreseeable future. But with the economy sputtering again, some wonder whether banks and businesses need assurances that those favorable interest rates will be around for years.

Former Fed Governor Laurence Meyer says the Fed could use more specific language.

Laurence Meyer: They'd have to do something that they have said they would never do, and that is to make an unconditional promise not to tighten for a very long time. No central bank wants to do that.

Because it would tie the Feds' hands if the economy suddenly took off and generated too much inflation. Another idea would be to inject more money into the banking system. The Fed could encourage bank lending by buying more Treasury bonds and mortgage-backed securities. That's what the Fed did during the depths of the credit crisis.

But former regional Fed Vice Chairman Gerald O'Driscoll says that didn't stimulate much lending.

Gerald O'Driscoll: It has given the banks a no lose, no risk, almost no risk, play -- which is to borrow at near zero interest rates and buy 10-year treasuries.

Which means banks have no incentive to lend that money to consumers. Both O'Driscoll and Meyer say the central bank can't do much about what's ailing the economy right now. For example, what can the Fed do about potential credit defaults in Europe? So for now, both Fed members expect the central bank to sit tight.

In Washington, I'm John Dimsdale for Marketplace.

About the author

As head of Marketplace’s Washington, D.C. bureau, John Dimsdale provides insightful commentary on the intersection of government and money for the entire Marketplace portfolio.

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