TOPICS > Economy

Federal Reserve Launches Aggressive Stimulus Program to Move Economy Forward

September 13, 2012 at 12:00 AM EST
Federal Reserve chairman Ben Bernanke announced the Fed's third attempt to stimulate the economy by buying up mortgage-backed securities and bonds and keep borrowing rates low. Judy Woodruff talks to David Wessel, economics editor for The Wall Street Journal, to understand why the Fed chose this course of action.
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JUDY WOODRUFF: And we turn back to the Fed’s decision to shift to a more aggressive course of action.

Investors and economists alike were talking today about the Fed’s intent to buy big volumes of mortgage-backed securities, but there was also heavy attention on the Fed’s decision to do this and to keep borrowing rates low for an undetermined period of time, until the job market and the broader economy show themselves to be substantially healthier.

David Wessel closely watches all of this as economics editor of The Wall Street Journal. He’s also the author of the books “In Fed We Trust” and his newest, “Red Ink.”

David Wessel, welcome back to the NewsHour.

DAVID WESSEL, The Wall Street Journal: Thanks, Judy.

JUDY WOODRUFF: So why did the Fed do what they did today?

DAVID WESSEL: Well, I think, at the beginning of the press conference that Ben Bernanke had this afternoon, he pretty much laid out the reasons why.

Unemployment is incredibly high, much higher than the Fed thinks it should be, much higher than full employment. And Mr. Bernanke said he’s willing to use all the tools he has to bring it down.

As you pointed out, he says he’s going to buy $40 billion a month in mortgages. And, importantly, he says the Fed will keep doing that or something like it until the labor market substantially improves.

And that’s a big change in their stance, that latter part.

JUDY WOODRUFF: And how different is this from what the Fed has been doing, what they have done before?

DAVID WESSEL: Well, in one sense, it’s not different. The Fed has bought trillions of dollars now in Treasury securities and mortgages before.

What makes this somewhat different is that they say, we’re not putting out a set sum of money. We’re not doing this for six weeks or six months. We are going to do it until we get results.

So that open-ended promise to do whatever it takes to bring down unemployment is the most significant change in this round.

JUDY WOODRUFF: And describing the results, I noted — I noticed at the news conference he was asked several times by reporters to explain what it was he was looking for that would signal things were better.

DAVID WESSEL: Right. He says, we will know it when we see it. This is an economist and a Central Bank that lives and breathes by numbers and tenths of a percentage point, but he wasn’t putting any numbers on this.

All he said was that obviously the Fed will need to keep — will have to stop before unemployment gets down to the bare minimum. It would stop somewhere before then.

But the Fed today released its forecast on unemployment through 2015, and it says that unemployment will be above 6 percent through 2015, and it believes the full employment rate of unemployment is below 6 percent. So this — he’s in this for the long haul.

In fact, the Fed may be in it far beyond Ben Bernanke’s chairmanship. His term ends in January 2014, and I personally don’t think he wants another one.

JUDY WOODRUFF: So let’s talk about what exactly they are saying they’re going to do. What are they going to be buying with this $40 billion every month?

DAVID WESSEL: They’re basically going to be buying mortgages.

Freddie Mac and Fannie Mae, the big mortgage companies that are now owned by the government, take the mortgages from the bank and turn them into securities.

And the Fed will buy $40 billion of those, which is a lot for that market. This will have a couple of effects.

One thing is, it might lower mortgage rates, which are already low, say another quarter percentage point. The 30-year mortgage is about 3.5 percent now. It could go down to 3.25 percent as a result of this, very low.

Secondly, it will have indirect effects. When mortgage rates go down, the price of houses tends to go up. That’s good even if you’re not refinancing a mortgage.

And also it tends to chase investors out of these low interest securities into things like stocks. So look what we saw today. As soon as the Fed made its announcement, the stock market went up.

That makes people wealthier, more willing to spend. It makes it easier for companies to raise money to invest. And it generally raises spirits in the economy, and that’s definite part of the program here for the Fed.

JUDY WOODRUFF: But there’s also skepticism out there that that’s actually going to happen, David. How did the chairman deal with those questions today?

DAVID WESSEL: Well, he acknowledges there’s skepticism.

Look, if this — he keeps saying this isn’t a panacea and that it’s kind of obvious. If it were a panacea, we wouldn’t be in this mess right now. But what he says is every little bit helps and this is — I have to do my job with the tools I have.

He made quite clear that he would really like some help from Congress on other things, particularly on housing. And he responded almost preemptively to concerns this will create inflation. He says it won’t.

And he kind of apologized, acknowledged that this is bad for savers. Elderly people who are living on interest are hurt by this, but he said it’s good for the overall economy.

JUDY WOODRUFF: So — and that leads me to the question, what does this mean? For the ordinary consumer, potential house buyer, retired person, whoever you are, how is this going to affect you?

DAVID WESSEL: Well, first of all, it makes mortgages cheaper. That’s good if you’re buying a house, and it’s really good if you want to refinance your mortgage, if you can refinance.

Of course, a lot of people are underwater. Their houses are worth less than the value of their mortgage, and they find refinancing hard.

If you have money in the stock market or you have a pension plan that has money in the stock market and the stock market goes up, that indirectly helps you, too.

And, finally, if it works as Mr. Bernanke hopes, it will make it just a little bit more likely that business will create jobs, so maybe unemployment will come down faster than it would have otherwise.

JUDY WOODRUFF: Now, David, the politics of this, obviously, this move comes in the middle of a hard-fought presidential campaign. We’re already hearing Republicans criticizing the Fed for intervening. I guess Democrats are happier about this.

How is Ben Bernanke responding to all that?

DAVID WESSEL: Well, you’re absolutely right.

The Republicans were all over the Fed today, either criticizing the Fed for doing this. Spencer Bachus, the head of the House Financial Services Committee, says it was a scathing indictment, not of the Fed, but of Barack Obama, that it suggests that Barack Obama’s jobs policies are wrong.

And Mitt Romney’s policy director chimed in and said, we should be creating wealth, not printing money.

Democrats were quick to ride to Mr. Bernanke’s defense. And Mr. Bernanke says and insists, both in public and in private, look, I’m doing my job. I’m focused on the economy. I don’t worry about politics.

But everybody knows that the Fed does have to worry about politics and they’re concerned that if they get too embroiled in politics, it will curtail their independence.

But for now, he insists, I’m doing what I’m doing because unemployment is high and inflation is below my target, and I’m not paying attention to the electoral calendar.

JUDY WOODRUFF: And, as you have pointed out, Mitt Romney had already announced that he will not reappoint Ben Bernanke when his term is up.

David Wessel…

DAVID WESSEL: That’s right.

JUDY WOODRUFF: David Wessel, The Wall Street Journal, thank you.

DAVID WESSEL: You’re welcome.