The Fed and a Sputtering Economy: What to Do Next?
Updated 2:30 p.m. EST
The Fed said Tuesday that it will buy some government debt in order to help push down long term rates on mortgages and spur recovery. The Fed says economic growth will be “more modest” than it had previously thought. Read the full statement here.
Posted 11:30 a.m. EST
With fresh signs that a weak recovery is sputtering, the Fed’s Open Market Committee meets Tuesday to consider whether to take any further action to boost the economy in a session that will be among the more closely watched in months.
To a large extent, the Fed and its chairman, Ben Bernanke, already took some unprecedented actions in the wake of the financial crisis and the recession it helped trigger: It lowered interest rates to a near-zero level and has kept them at record low levels for months now. It also purchased more than $1 trillion in mortgage-backed securities at a time when faith and credit were in total free fall.
When the recovery looked a bit more promising earlier this year, Bernanke and many of his colleagues on the Fed board continued to talk about eventually reaching a point where the Fed would pull back on its role for fear of spiking inflation and financing recovery through huge debt obligations. But the Fed has been starting to come under some renewed pressure this summer as the jobs market continues to look weak (more than 130,000 jobs were lost in July).
And with inflation so low and the economy looking tepid, there are a growing number of people (even among some members of the Fed) about whether the U.S. could face the prospects of deflation and its consequences. The president of the Federal Reserve Bank of St. Louis drew attention to that dilemma when he published a paper on that question last month.
So when the Fed meets Tuesday, policymakers must considering whether it is time to make further announcements about keeping interest rates low for a sustained period of time. Or perhaps to take more aggressive actions such as buying significant levels of new assets to help prop up the economy — a measure that would surely be seen by markets and economists as a sign of real worry among Fed members about where things are headed.
For a more detailed look at what the Fed may do — or more likely signal — the Wall Street Journal and the Washington Post have good explainers about what Bernanke and his colleagues are contemplating.
There are those who argue that the Fed simply isn’t doing enough and isn’t doing an adequate job of balancing its twin goals of controlling inflation and promoting growth in the U.S. Paul Krugman made that case in a recent column. And the Journal’s David Wessel wrote of the dilemma Bernanke is facing.
We’ll have more on the Fed’s decision later on the Rundown and on Tuesday’s NewsHour broadcast.