Fallout: The Financial Crisis

Reading between the lines of the Fed’s decision

Jeremy Hobson Sep 21, 2010
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Fallout: The Financial Crisis

Reading between the lines of the Fed’s decision

Jeremy Hobson Sep 21, 2010
HTML EMBED:
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TEXT OF INTERVIEW

Kai Ryssdal: It’s not like anybody was expecting the Fed to actually do something on interest rates at its meeting today. The key short-term rate that the Federal Open Market Committee controls — the federal funds rate, it’s called — is going to stay right where it is, just about zero percent. In other words, it’s still really cheap for banks to borrow from each other. But Mr. Bernanke and his colleagues did offer a somewhat depressing view of the economic recovery.

Marketplace’s Jeremy Hobson is on the line from New York with the Fed story. Hey Jeremy.

Jeremy Hobson:Hi Kai.

RYSSDAL: As always, when the Fed doesn’t do anything on interest rates, it is about what they say in their statement. So, what’d they say?

HOBSON: Well Kai, they said that the pace of the recovery has slowed in recent months and that it’s only likely to be a modest recovery going forward. Also, that inflation is below the levels the Fed likes to see — in fact, they mentioned that twice in the short statement that they released. Now having heard all that, you think, maybe they’re ready to announce some big steps, but it turns out that all policy makers are prepared to do is what they called, “additional accommodation, if need be.”

RYSSDAL: Translate that for me, would ya? “Additional accommodation,” what does that mean?

HOBSON: I don’t think it means getting more rooms at the Ritz. But what it means I think is quantitative easing; it means the Fed is printing more money to buy even more bonds, to try push long-term interest rates down even further and boost lending. Now why aren’t they doing more of that now? Well, I spoke with Bruce McCain, who’s the chief investment strategist at Key Private Bank and he says they don’t want to make any sudden movements that might inject them into the 2010 congressional elections.

Bruce McCain: With the markets showing some signs of stability, I think they feel they’ve got some time to sit back a little bit, try to get through the elections, not put themselves squarely in the middle of a political debate.

HOBSON: And Kai, Bruce McCain said if the Fed is going to try to help the economic recovery, it may do so later this fall. And the next meeting, by the way, concludes the day after the mid-term elections.

RYSSDAL: Yeah, saw that in the calendar today about that next meeting, which is actually kind of fascinating. But let me ask you this, Jeremy: If they’re not going to do anything right now, or perhaps even before the elections, where does the Fed actions stand in terms of the whole economic recovery? Put it in context for me.

HOBSON: Well, we could be at the point where the Fed has done everything it’s going to do to spur recovery. Now if things get a lot worse in the coming months, obviously the Fed may step in with more action. But right now, one of the most important jobs of the Fed is going to be to instill confidence. Because investors pay very close attention to the wording of these announcements, and the fact that the Fed didn’t jump in with new measures today, perhaps signals a certain degree of confidence in the recovery. I spoke with David Kelly, who’s the chief market strategist at JPMorgan Funds and he summed it up pretty well.

David Kelly: People know there’s not much the Fed can do to help the economy out. So if they say they are worried or implied that they’re worried because they’re bringing some more medicine to the party, that’s only going to scare people because people don’t think the medicine could really work. So it’s better for them to say as little as possible.

HOBSON: And Kai, he says as long as things stay stable in the markets, the Fed will likely sit back and hope for the best. He calls them “a very patient bunch.”

RYSSDAL: Marketplace’s Jeremy Hobson in New York on the Fed and reading between the lines and what it all means. Jeremy, thanks a lot.

HOBSON: You’re welcome.

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