A news story posted by The Wall Street Journal — under the headline “Fed Expresses Modest Optimism” — reported that at their meeting last month, Federal Reserve officials “refrained from taking new steps to charge up the economy as they expressed some modest optimism about the recovery while they continue to debate ways to bring unemployment down without stoking inflation.”
The WSJ report went on to state that the Fed's decision-making body voted 9-1 “to leave their easy-credit policies” [that's the newspaper's description!] unchanged for the first time since August, citing an economy that's “strengthened somewhat in the third quarter.”
Hearing the Fed has “modest optimism” about the ragged economic recovery might not make Wall Streeters jump for joy, but it should bring some, albeit small, comfort to everyone who lives and breathes and works — or is looking for work — on Main Street. However, I am very guarded about what this latest pronouncement by the Fed adds up to for three reasons.
Firstly, in terms of “easy-credit policies,” what exactly was The Journal reporter referring to? Maybe it is a reference to banks loaning to banks, but I for one have not heard of much if any loosening of credit to businesses or consumers. Certainly not enough to encourage businesses to start hiring again let alone enough to enable most consumers to buy more than just what is absolutely necessary to sustain their individual standards of living.
Secondly, how much longer does the Fed — and the White House and Congress, for that matter — need to debate “how to bring unemployment down without stoking inflation” before they actually make policy decisions that would do just that?
Thirdly, the Fed apparently did not even note what impact the brewing financial crisis in the Eurozone — what some pundits refer to now as “Eurogeddon” — will have on the fragile economic recovery in place here. Certainly, if nothing else, Europe is headed into recession even now and that can only be bad news for U.S. exports if not our entire economy.
Writing in Newsweek way back in May, columnist Robert J. Samuelson contended that Fed Chief Ben Bernanke is betting on embracing “super-easy credit” to cut the appalling 8.8% jobless rate; that's 13.5 million people, nearly half out of work for six months or more. Since late 2008, the Fed has held short-term interest rates near zero. To cut long-term rates, the Fed is buying gobs of Treasury bonds and mortgage securities: $1.725 trillion from late 2008 to March 2010; an additional $600 billion from last November through June. These purchases are known as QE1 and QE2, for “quantitative easing.”
But Samuelson pointed out that it's questionable whether “all the pump-priming” is aiding the recovery or boosting inflation. “The economy's fate may hang on who's right,” he wrote. “Studies by Fed economists are, not surprisingly, supportive. One estimated that QE1 and QE2 lowered long-term interest rates by about 0.5 percentage points and saved nearly 3 million jobs; the jobless rate otherwise could have approached 11%. Many private economists are less impressed; they suspect the benefits of QE1 faded with QE2.”
I am not an economist, a central banker or a politician so while I am rooting for Bernanke to be right, I won't even hazard a guess as to whether his bet will in the end pay out. But as a student of history, I know that past financial crises that this country endured were ended — or at the very least, steered toward an ending — not by endless dithering, but by bold governmental action expressed by political leaders who had the ability to garner the support of both business interests and consumers.
David Cullen is Fleet Owner's executive editor. He can be reached at [email protected]