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Federal Reserve Punts on Further Action to Aid Economy

The Federal Reserve made no changes after its latest FOMC committee, staying the course of a modest monetary easing program and keeping the federal funds rate at a low level, until mid-2013, according to the statement.

In the release, the Fed writes that the economy undertook moderate expansion since their last meeting in November, “notwithstanding some apparent slowing in global growth.” The trouble spots for the US economy are that “business fixed investment appears to be increasing less rapidly and the housing sector remains depressed.” This is interesting, because the 100% bonus depreciation for exactly that business fixed investment has been in effect all year. This suggests there are some diminishing returns for that policy, which the House payroll tax/UI bill attempts to extend for another year. Similarly, the housing sector remains a lead weight on the economy, and absolutely none of the various federal programs aimed at alleviating that have worked.

The Fed also believes that the situation in Europe will pose “significant downside risks to the economic outlook,” and that inflation will settle “at levels at or below those consistent with the Committee’s dual mandate.” This is insane. An inflation level below the Fed mandate represents a failure to meet that mandate. There’s no difference between missing the target a bit high or a bit low, except for the likely benefits to the overall economy. But it’s beyond clear now that the inflation target acts as a ceiling, and the Fed sees a half-percent below that ceiling as clearly preferable to a half-percent above.

In the end, the Fed will continue “Operation Twist,” an effort to trade short-term securities for longer-term securities, to lower long-run interest rates. They will also reinvest their securities payments in more securities, consistent with the policy announced months before. The federal funds rate stays the same.

Only one member of the Federal Open Market Commmittee dissented from this approach. Charles Evans, the President of the Chicago Federal Reserve, voted against the action, because he “supported additional policy accommodation at this time.” Evans said back in September that high unemployment represents a huge failure on the part of Fed policymakers. He again was disappointed today.

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David Dayen

David Dayen

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