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What the Federal Reserve can/can’t do

John Dimsdale Aug 27, 2010

What the Federal Reserve can/can’t do

John Dimsdale Aug 27, 2010


STEVE CHIOTAKIS: Central bank leaders from around the world are in Jackson Hole, Wyo., today, to hear U.S. Federal Reserve chairman Ben Bernanke speak. They’re there to take part in a big central bankers’ convention and talk policy in this global economic recovery.

For his part, Bernanke’s Fed has been trying to assure banks and stock markets that it does still has tools to prevent the economy from falling back into recession. But there seems to be a difference of opinion over what to do next.

Marketplace’s John Dimsdale now —
with what the Fed can and can’t do.

JOHN DIMSDALE: Lowering short-term interest rates is the Fed’s usual tool to stimulate the economy. But that’s not an option now since they’re already zero.

One idea is for the Fed to stop paying interest to banks that have parked their reserves at the Fed. The theory is that would force banks to take the money out to find more profitable uses and maybe lend some of it.

T Rowe Price economist Alan Levenson says not necessarily.

ALAN LEVENSON: They’re just going to take the money and put it in other overnight and short-term assets. They’re not going to lend it to you and me if they’re too worried they’re not going to get their money back.

One radical suggestion is for the Fed to force banks to lend by giving them currency that expires if they don’t spend it.

Wharton Business School professor Jeremy Siegel says that’s a bad idea.

JEREMY SIEGEL: We know there are hundreds of billions of dollars outside the U.S., people holding that in safe-keeping. If there’s any nervousness there could be a terrible run on the dollar that could bring big disruption.

With only weak options left, Fed watchers are wondering how can Ben Bernanke instill confidence that the Federal Reserve can rescue the economy — should it be necessary.

In Washington, I’m John Dimsdale for Marketplace.

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