Fed digs into toolbox for more solutions
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KAI RYSSDAL: It is a curious dilemma that the Fed has been wrestling with the past two days: Where do you go when there’s nowhere to go but up — but you only want to go down? Ben Bernanke and the Federal Open Market Committee have been gathered in Washington the past two days for what is usually referred to as a meeting on interest rates. But with nowhere to go but up, the FOMC chose to go nowhere with the federal funds rate today.
The target for that rate — that’s the rate at which banks lend money to each other overnight — is already officially set at a range of zero to 0.25 of 1 percent. For an institution whose bread and butter is interest rates, that’s a problem. The Fed declared today that the economy has indeed gotten worse since December. So what does Bernanke do if he can’t cut interest rates? Marketplace’s Jeremy Hobson has the answer.
JEREMY HOBSON: Lucky for the Fed, inflation is not a concern. Deflation is. And how do you deal with deflation when you can’t lower rates? You print money and buy debt. Economists call this quantitative easing. Former Fed economist Ann Owen — now of Hamilton College — says it’s aimed at bringing down long term interest rates to get people spending again.
ANN OWEN: You know, usually they don’t do that because they have the ability to influence the short rate, and when you influence the short rate, you’re going to influence the long rate that way. But they don’t have any more ability to do that.
In its statement today, the Fed changed its wording from last month, when it said it was evaluating the benefits of buying long-term Treasury securities. Now it says it’s prepared to buy. Chris Low, chief Economist at FTN Financial says that’s not strong enough language for bond holders.
CHRIS LOW: It’s time to stop talking and start doing. And unfortunately in this statement, we got no indication that the Fed is ready to actually begin ramping these programs up.
That could be because the Fed’s balance sheet, already at about $2 trillion, would have to grow much bigger.
They’re going to buy assets that have default risk. They’ve never done that before. And I suspect they’ve got cold feet.
But Ann Owen says the Fed can’t get into the habit of promising things it’s not going to deliver.
OWEN: The Fed’s ability to impact the economy is greatly enhanced by people’s belief that it can.
HOBSON: So you’re a former Fed economist, do you believe that it can?
OWEN: I think so. I think they have a really tough job.
A job she says will be a lot easier once Congress passes the stimulus package.
In New York, I’m Jeremy Hobson for Marketplace.
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