The Federal Reserve offered a grim assessment of the American economy Wednesday, declaring flatly that recovery was still years off and that even more aggressive measures were necessary to help stimulate growth. Those measures, the Fed announced, would include the purchase of more than $400 billion in long-term government bonds, to dry up the supply of safe investments and bring interest rates down on riskier lending.
The move is aimed at easing the credit crunch and encouraging banks to lend more, so that businesses can re-invest in equipment and workers and consumers can take on loans like mortgages to buy homes and spur construction. The Fed said it would raise the money for the program not by printing more currency and expanding its balance sheet, but by selling off short-term Treasury bonds whose interest rates have hit historic lows.
The move is certainly unconventional, and a response to growing calls from analysts and Federal Reserve officials for increased monetary stimulus to make borrowing easier. The goal, the Fed said, is to have a real, quantifiable impact on the cost of doing business, for both business owners and consumers. If loans are cheaper, the Fed hopes, businesses will invest in expansion, hiring more workers and purchasing more goods and services. Consumers, too, will hopefully have an easier time securing loans such as mortgages, which would help revive the sluggish housing market, which has constrained the anemic recovery.
Although the program is different from “quantitative easing” in that it doesn’t require the fed to print more money ex nihilo — out of thin air, essentially — it nonetheless doubles down on exactly the kind of stimulus Republicans have derided as burdening the government with fresh piles of debt. Texas Gov. Rick Perry has twice called the Fed’s policies “treasonous,” and quantitative easing has become something of a bete noir of the Tea Party, which claims the Fed is encouraging ruinous inflation and degrading the value of the dollar.
Rep. Scott Rigell, a Republican freshman from Virginia, gave new voice to those concerns Wednesday, admonishing the Fed for encouraging levels of inflation that would continue to surpass economic growth. “It’s indisputable that low-interest rates favor job creation. That said, the Fed has been, I think, overly aggressive in increasing the money supply, which I think creates the very real risk over time of inflation, including the risk of hyperinflation,” Rigell said. “If they artificially inflate the money supply, it’s what turns countries into banana republics.”
Of course, it’s worth noting that inflation is hardly the key criterion for determining whether a nation qualifies for “banana republic” status. Rather, banana republics are generally synonymous with oligarchies, nations where public policy is designed exclusively for the benefit of private corporations. Barons are granted exclusive access to the country’s natural resources — e.g., bananas — in order to exploit those resources for private gain.
That said, there is, of course, a legitimate concern among some economists that aggressive stimulus by the Fed could eventually trigger spiraling inflation that outpaces consumer demand — a trend that, once it begins, is very difficult to reverse. So far, however, most economists agree that, between the twin threats of inflation and unemployment, unemployment is by far the more worrisome trend, and thus more deserving of the Fed’s attention.
In fact, Fed officials across the country have been crying out for more aggressive measures to counter unemployment. The Fed’s two responsibilities, by charter, are to maintain price stability and encourage full employment. Officials say the central bank has spent too much time worrying about the former while not being proactive enough about the latter, especially in light of the fact that inflation has been meager by historical standards, while unemployment has remain virtually unchanged in the last year or so (in August, the economy generated zero new jobs, according to the Department of Labor).
In a speech earlier this month, Charles Evans, the president of the Federal Reserve of Chicago, chastised the central bank for what he said was its misguided focus on inflation. Unemployment, he said, was the chief ailment infecting the atrophied economy, and necessitated urgent action. If inflation were at unacceptable levels, Federal Reserve officials would be acting “as if their hair was on fire,” Evans argued. “We should be similarly energized about improving conditions in the labor market.”
With its new policy of buying up long-term Treasury bonds, the Fed may at last be heeding Evans’s call — even if the Tea Party objects.