GWEN IFILL: The Federal Reserve takes a bold step that could have its own political implications.Jeffrey Brown has the story.
JEFFREY BROWN: They have tried one thing and another, and now another very big thing.In its latest attempt to boost a struggling economy, the Federal Reserve announced today it will buy $600 billion more in government bonds by the middle of next year.
Explaining its move, the Fed cited data that confirms that the pace of recovery in output and employment continues to be slow.Employers remain reluctant to add to payrolls.Housing starts continue to be depressed.Longer-term inflation expectations have remained stable.But measures of underlying inflation have trended lower in recent quarters.
And now, of course, the Fed is acting amid a very new political order that will also impact the economy. We look at all this with David Wessel, Wall Street Journal economics editor and author of “In Fed We Trust: Ben Bernanke’s War on the Great Panic,” and Chrystia Freeland, global editor at large for Reuters.
David, I will start with you.First, help us understand exactly what the Fed is doing today and how it’s supposed to stimulate growth in the economy.
DAVID WESSEL, economics editor, The Wall Street Journal:Well, what the Fed is doing today is announcing a program of printing $600 billion worth of money — that’s what a central bank does — and using that money to buy long-term Treasury bonds in the market.
This will push up their price and push down the interest rate on those bonds, and they hope that will spread to other bond — other debt in the economy, mortgage rates and corporate borrowing.And that should make it easier for some people to borrow, make them a little more willing to borrow, and make them spend a little more money.
They also hope that this will raise the price of stocks, because they figure people will not want to buy bonds anymore because the yields are so low.That will make people feel and actually be richer.Maybe that will help them spend a little more.
And, finally, although they don’t admit it, they know that this will tend to depress the value of the dollar on world currency markets.That will make it easier for American exporters to sell more stuff.And that too should contribute to growth.
JEFFREY BROWN: And, Chrystia, just to continue the explanation here, this line that I read at the end of that statement, “measures of underlying inflation have trended lower,” that means the Fed is worried about deflation, right, of things spiraling down.
CHRYSTIA FREELAND, global editor at large, Reuters: Absolutely. I mean, what the Fed is worried about, in its most extreme scenario, is that you experience in the United States what happened to Japan in analogous circumstances, where the country was just unable to get out of recession, and, instead of having growth, you had a deflationary trap and things just sort of trending downwards and downwards.
And we have had some worrying signs of that.We have seen now in the bond market actually this astonishing thing where investors have actually paid the government money to lend them money.That’s a really big deal.And it does suggest that the markets, longer-term, are worried about what is going to happen with — with the U.S. inflationary, deflationary environment.
JEFFREY BROWN: All right, now, David, I mean, what’s interesting about this is, all the lead-up to this move, all the talk refers to it as uncertain whether it will work, risky, controversial.Explain that.What are the positives and the risks here?
DAVID WESSEL: We are really in unchartered waters — uncharted waters here.We will learn over the next year whether this works or not.
The Fed, even the proponents of it, can’t be sure that it will work.What they’re saying is that they had a choice:Do this or do nothing.In ordinary times, they would cut the short-term interest rates that they influence directly, but those have been at zero since December of 2008.
So, they are basically saying:We are taking a risk here.We’re not sure this will work.We have looked at the risks, the risk that this will create too much inflation down the road, the risk that this will trigger a massive decline in the value of the dollar, the risk that this will undermine confidence in the U.S. government, the risk that this will make the Fed somehow seem less independent of the political process.We have looked at all those things.We have looked at inflation.As Chris just said, we have looked at unemployment, and we have decided this is a risk worth taking.
JEFFREY BROWN: Now, Chrystia, I want to you start connecting the dots here to this election we had last night.
So, now we have the Fed acting on the one hand today, and we have a president and Congress over on this side with a new, very new, political balance.How have things changed?And connect the dots for us a little bit.How have things changed in terms of responding to the economy and the jobs problem?
CHRYSTIA FREELAND: Well, I think it’s a really paradoxical moment, isn’t it, because, on the one hand, you have, you know, a lot of economic analysts, people on Wall Street, saying hurrah with the election results.
And one of the reasons they’re cheering is, they say, this means there is going to be gridlock in Washington. The politicians aren’t going to be able to do anything. And I think that…
JEFFREY BROWN: Explain that, though.Explain that.Why — why is gridlock considered a good thing for some people?
CHRYSTIA FREELAND: Well, you know, the point of view of a lot of businesspeople — and I’m not saying whether I agree with this, but the point of view is, you know, as long as Washington doesn’t mess around with them, that that will create a nice stable environment; it will be possible to make good decisions.
But, at the same time — and I do think that it is quite likely that we will now have gridlock in Washington — you have this really big non-elected actor coming in with actually a really big measure. You know, the size of this quantitative easing is nearly as big as the TARP was. It’s nearly as big as the first stimulus was.
So, in a way, at a moment when you’re seeing the elected politicians really move into paralysis, paralysis that was chosen by the voters, you have the unelected, you know, in Fed we trust, the great Ben Bernanke, moving in and saying, OK, the politicians, the elected politicians, can’t do anything, but I am really worried about the economy, and so we’re going to come in with a really big stick.
JEFFREY BROWN: David, how do you connect the dots?Because it is awfully interesting that you have the election last night, and then the very first big policy thing that happens is this Fed move.How do you — how do you — how do we think about them?
DAVID WESSEL: I think the timing is a little bit coincidental.The Fed plans its meetings — calendar a year in advance.
But I think what’s going on here is that there are a lot of economists, including some at the Fed, who think that the smart thing for the U.S. government to do now is to do some more short-term fiscal stimulus, tax cuts and spending increases, and package that with some long-term deficit reduction.
They think that would be the right medicine to help the U.S. economy now, and shore up confidence, investor confidence, in the U.S. economy in the long run.They don’t think that’s going to happen.So, sitting there at the Federal Reserve, looking at the statute that says that they are supposed to do whatever they can to have maximum sustainable employment and price stability, seeing unemployment too high and inflation too low to meet that standard, they are stepping into the vacuum, just as they did at the beginning of the financial crisis, when Congress was reluctant to act, and the president, then President Bush, was happy to let the Fed do the heavy lifting.
JEFFREY BROWN: So — so, David, does…
CHRYSTIA FREELAND: And, in a way…
JEFFREY BROWN: Oh, go ahead, Chrystia. Go ahead.
CHRYSTIA FREELAND: No, I was just going to agree with David and say, you know, so, what’s really interesting is, Ben Bernanke is a Republican, and he was appointed by a Republican, but, in a way, he is sort of picking up the ball which the now Republican-controlled legislature, you know, the smart money is betting, will not be able to carry on.
It is a really interesting moment, where you have, in a way, the country’s chief nonpartisan economic decision-maker, but who — appointed by a Republican, effectively saying:I think there should be more stimulus.And, since it’s not going to happen, I happen to have my own printing press, so I’m going to print some more money.
JEFFREY BROWN: And, David, when you — when you look at the deficit, and the debt, and the politics of the time, how cramped or crimped is government in general in terms of trying to deal with the economic problems of the time?You’re saying the Fed doesn’t think anything is going to happen.
DAVID WESSEL: Right.I don’t think — I think that, if the U.S. government wanted to, it could borrow more money now and do more stimulus, and it would be a good idea if it, at the same time, said, here’s our business plan for paying back some of this debt.
The problem is not economic.But it looks like the rest of the world wants to lend us almost unlimited amounts of money at very low interest rates.The problem is really one of political leadership and gridlock, as Chrystia said.And it’s why we have an independent Central Bank, so that sometimes, when the politicians can’t act, the rest of us don’t have to suffer, we have another escape valve, really, that the Fed is providing to try and help the economy, which is growing so slowly, that we’re at risk of seeing unemployment rise from here, rather than fall, as we all hope it will.
JEFFREY BROWN: So, Chrystia, just briefly, to end, I mean, we hear — we heard today President Obama come out. We heard the GOP leadership come out.
What do you look for, from where you sit, going forward now in terms of government’s ability — while the Fed is acting on the side here very strongly, in terms of government’s ability to — to help — help the economy?
CHRYSTIA FREELAND: Well, I think the reality is, it seems very unlikely that you’re going to have the elected politicians right now, after this very strong Republican showing, come up with a second stimulus.
And the problem is, you know, as David was suggesting, yes, the Fed is carrying the water.But having the Fed do this, having it come from the monetary side, has a different impact than it would if you had fiscal policy, if you had the government actually spending money, too.
And I think the problem is, when the Fed acts as it does, printing more money, it’s a rich-get-richer phenomenon.This is going to be great for the banks.It’s going to be great for people whose personal finances are strong enough that they can re-mortgage — refinance their mortgages.
But it’s not so great for the people who are in trouble.And that’s one reason why it might not have as powerful an impact as the Fed would like.
JEFFREY BROWN: All right, Chrystia Freeland, David Wessel, thanks very much.
DAVID WESSEL: You’re welcome.
CHRYSTIA FREELAND: Pleasure.