In a news conference on Wednesday, Federal Reserve Chairman Ben Bernanke made it clear that the Fed will act if unemployment doesn’t start coming down from its 8.2% level. Dr. Bernanke said:
“I wouldn’t accept the proposition that the Fed has no more ammunition. [I]f we don’t see continued improvement in the labor market we’ll be prepared to take additional steps.”*
The Federal Reserve also announced that it would continue its “Operation Twist” program through the end of 2012. In Operation Twist, the Fed sells short-term securities and uses the proceeds to buy longer-term securities. The idea is to lower long-term interest rates and, thereby, encourage business investment and personal spending.
The Wall Street Journal is skeptical of the extension of Operation Twist:
“Fed officials clearly feel the need to do something to spur growth, but if the price of money were the answer the economy should be booming. Instead, each episode of monetary easing has inspired a burst of market euphoria followed not long afterward by a slow-growth hangover. …
The basic mistake is relying on monetary policy to conjure growth, when what we need are supply-side fiscal and regulatory policies.”**
I would say it a little differently. I think the Fed would be making a mistake if it tries to do too much. There are things it can do. Paul Volcker showed how it can cut inflation (if it has political backing, which he did). But the Fed can’t do everything. And it shouldn’t try.
In terms of helping the economy, the key for government, whether the Federal Reserve or Congress or the President, is to set the right conditions so the economy can grow. In doing that, there are certain things the Fed can do – and needs to do. But there are also things that need to be done by the political branches. Currently, Congress and the President can’t agree on doing those. The President thinks government should one thing. The House thinks it should do something else. And Senate, well, it just doesn’t seem to think anything.
But just because the Congress and President aren’t doing their job, doesn’t mean the Federal Reserve should try to do it for them. When the Federal Reserve does the things that it knows how to do and that are within its area of competence, it can do a good job. But when it tries to do things that are beyond its competence (other than in absolute extreme emergencies, like the fall of 2008), it will not only probably fail at what it is trying to do, but it may also reduce its ability to actually do the things it normally can do.
Let me channel my inner George Will and make a baseball analogy: When Sammy Sosa tried to hit home runs, he usually couldn’t. He’d often strike out or pop up. But when he “stayed within himself,” when he didn’t over-try, he could hit them. And he did. There is an old baseball saying: You can’t hit a three-run homer with nobody on base. In other words, don’t try to do too much. You need to do your job and let your teammates do theirs. Because when you try to do too much, you won’t even do what you normally can do.
That is what the Fed needs to remember. It needs to “stay within itself,” i.e., to stay within its expertise and within what it can do. If it does, it will do its part. But it shouldn’t try to hit a three-run homer with nobody on base. It can’t do it all by itself. It needs to rely on its teammates, Congress and the President, to do their part. If they don’t do their job, that is their fault, but the Fed shouldn’t try to make up for their failure by doing something it can’t do. Because by trying to do too much, the Fed could easily wind up not even accomplishing what it actually can do. And reducing its credibility for being able to do its real job in the future.
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* Kristina Peterson and Jon Hilsenrath, “Fed Warns of Risk to Economy,” The Wall Street Journal, June 21, 2012.
** “Twist and Pout,” The Wall Street Journal, June 21, 2012.
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