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What’s Behind the Federal Reserve’s Surprising Decision to Keep Up Stimulus?

September 18, 2013 at 12:00 AM EDT
Chairman Ben Bernanke announced that the Federal Reserve would continue its stimulus effort of pouring money into the bond market because the economy still needs help. Gwen Ifill talks to Neil Irwin of The Washington Post for a deeper look into the thinking at the Fed.

GWEN IFILL: And we return to the Fed’s surprising decision to keep pouring money into the bond markets.

At an announcement and news conference today, Chairman Ben Bernanke said the Fed’s stimulus plan through which it purchases $85 billion a month in securities is needed because the economy still needs help. Many experts had predicted a Fed pullback, but Bernanke defended the move.

BEN BERNANKE, Federal Reserve Chairman: We try our best to communicate to markets. We’ll continue to do that. But we can’t let market expectations dictate our policy actions.

Our policy expectations have to be determined by our best assessment of what’s needed for the economy. What we will be looking at is the overall labor market situation, including the unemployment rate, but including other factors as well. But, in particular, there is not any magic number that we are shooting for. We’re looking for overall improvement in the labor market.

GWEN IFILL: Today’s moves comes amid a very public and highly- anticipated decision from the president about who will succeed Bernanke next year.

We look deeper into the Fed’s thinking with Neil Irwin, who covers the financial world for The Washington Post. He’s also the author of “The Alchemists: Three Central Bankers and a World on Fire.”

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Welcome, Neil.

NEIL IRWIN, The Washington Post: Hi.

GWEN IFILL: So, I know the Fed prides itself on not responding to expectations, and what we saw today was, they confounded expectations. Why?

NEIL IRWIN: Well, you know, we have had this — the stimulus coming out of the Federal Reserve for the last year, $85 billion a month they’re pumping into the financial markets.

And the expectation was, it’s time to turn that spigot back and start to turn down the dial. And that assumes the economy is doing well and can support itself on its own. It’s time to end the program. What Ben Bernanke and the Federal Reserve were saying today is not just yet. There’s enough risks out there, there’s enough weakness in the labor market, there’s enough rise in interest rates recently and enough risk on the fiscal side, enough risk out of the government that they don’t want to pull back on that stimulus just yet. They’re going to wait a little longer.

GWEN IFILL: I’m not an expert on these things, but I was surprised by his emphasis on the employment landscape.

NEIL IRWIN: Yes, we have seen that out of the Federal Reserve over the last year or so, a very strong emphasis on trying to get unemployment down, trying to get jobs up.

Inflation has been well-controlled. That’s normally what the Fed pays attention to. Now they’re very much focused on trying to get the job market looking better in the United States.

GWEN IFILL: It also seems as if the Fed is a little bit focused on what’s happening or not happening I guess on Capitol Hill. When he said today that fiscal policy is restraining growth and a source of downside risk, fiscal policy, it sounds like he was wading into kind of the political morass on Capitol Hill.

NEIL IRWIN: Yes. You almost detected a note of frustration out of Ben Bernanke that, as the Fed has done all these things to try and get the economy going, Congress seems to be working the other direction.

There are two aspects to it. There’s the longer-term fiscal drag. We had tax increases at the start of the year, the sequestration, spending cuts. All those things are dragging on growth. And that’s been a slow-moving thing that’s been the case for months. At the same time, there’s the risk of something much worse, which is as we get this fiscal standoff over the next few weeks, will there be a shutdown in the government? Will Congress be unable to reach a deal to fund the government?

Will they threaten to raise the — to not raise the debt ceiling and risk a financial crisis like there was back in summer of 2011?

GWEN IFILL: If I was listening closely enough, it sounded like he’s more concerned about the debt ceiling battle than anything else.

NEIL IRWIN: I think that’s right.

I think what Ben Bernanke fears most is the kind of thing the Fed can’t do anything about, which is a financial crisis that is brought about not by external factors, but kind of self-induced by Congress not — you know, playing games with the debt ceiling.

GWEN IFILL: OK. Let’s play elephant in the room, because the question that he was going to be asked today and which, of course, he found a way not to answer, which is — was about who’s going to succeed him. But we don’t know officially that he’s leaving, do we?

NEIL IRWIN: That’s right. His term is up January 31.

He has studiously avoided even commenting on his own future plans. That said, it’s crystal clear to anyone who follows this stuff carefully that Ben Bernanke is planning to step down when his term is up at the end of January. And now we’re getting some clearer indications of what direction the president is leaning in appointing a replacement.

It looks like he’s going to be nominating Janet Yellen, the current vice chair of the Fed, to follow Bernanke.

GWEN IFILL: Well, let’s talk about the people who are in line to replace Bernanke, because Janet Yellen used be a number-two — is a number-two person at the Fed, but also Donald Kohn is also supposed to be under consideration.

Tell me about those two.

NEIL IRWIN: That’s right.

So, Janet Yellen is the current number two. She has been a key deputy to Ben Bernanke over the last three years and really an engineer of these unconventional policies to try and get jobs on tracks. She’s been very focused, laser-focused on employment that last few years.

Don Kohn was the previous vice chairman. He retired in 2010, though he’s kept busy since then, and would be a more — he’s focused on unemployment, he’s focused on financial stability. He brings a lot of experience as well. The question is, does the president want to go with kind of the obvious choice, the number two who is sitting there, who would bring continuity with the current Bernanke policies, or cut a different direction?

GWEN IFILL: But until Larry Summers pulled out of this, she wasn’t the obvious choice, was she?

NEIL IRWIN: Well, it’s funny. It’s gone full circle.

Back in the spring, most Fed watchers were pretty certain that Janet Yellen was going to get the job. Then, over the summer, we got these rumblings that the president was leaning toward Larry Summers. Just over the weekend, just a few days ago, Larry Summers has pulled out of the running. So now it appears Janet Yellen is once again the front-runner to be the next Fed chairman.

GWEN IFILL: As everybody waits to see what effect the Fed will have on — will have or will exert on the economy and the state of the economy, doesn’t whoever the next Fed chairman is, isn’t that person encountering the same plate of woes?

NEIL IRWIN: Absolutely.

You know, there’s not much reason to think that things are going to radically change in the economy in the next three or four months. That means whether it’s Janet Yellen or someone else, they have to make some very hard decisions. How long should the Fed keep these very low interest rate policies in place, this massive bond buying?

The next chairman will inherit something like a $4 trillion Federal Reserve balance sheet. How and when do you pull that away to avoid risking inflation while still trying to promote growth? That’s the trillion-dollar question that the next Fed chair will have to answer.

GWEN IFILL: So, let’s talk about this Fed chair for one more minute.

Today, he passed on the chance to do anything or to send a signal to anybody that this was — there was a future, that we were coming out of the hole that the administration keeps telling us we are out of. Why? Why?

NEIL IRWIN: I think over at the Federal Reserve, they’re not convinced that this economy — they think it’s growing, they think there has been progress over the last year, unemployment has come down. It’s not quite enough.

They’re not sure this is a well-entrenched-enough recovery that it’s time to start pulling away the support struts, and in particular at a time when inflation has not been a risk. Inflation has been very low. Ben Bernanke and the Federal Reserve feel like, let’s give it another at least couple months and see what happens.

GWEN IFILL: So, what are the signs to watch, to watch for, for us, as laypeople, when we know that the Fed will finally pull their role out, will out of this?

NEIL IRWIN: The overall headline number that gets most emphasized is of course the unemployment rate.

But there’s a lot that goes into that. It’s not just the overall unemployment rate. It’s, why does unemployment go down?


NEIL IRWIN: Are people dropping just out of the labor force, giving up? That’s not a very good sign.

So you have to look at other measures. You look at the ratio of the population that has a job. You look at the number of jobs that companies are adding to their payrolls. You look at things other than jobs. You look at growth numbers and you look at how many people are finding new positions.

It’s not just one number. And that’s something Ben Bernanke emphasized today. It’s a broad set of things you want to look at to understanding, is this economy taking off and really gaining momentum or is it still stagnant?

GWEN IFILL: Is it still stagnant, what everybody is waiting to see.

Neil Irwin of The Washington Post, thank you so much.

NEIL IRWIN: Thank you.