Not sure what it will take to get this economy moving again? Don’t feel bad. The U.S. Federal Reserve isn’t sure, either.
The 10-member committee that sets monetary policy is currently split 7-3. It’s not a little split. It’s more like an ideological divide, arguably the most fundamental disagreement among Fed policymakers in more than two decades.
The majority supports an accommodative stance to promote growth. The Fed 3 worry that the majority is inviting inflation. By law, the Fed has two equal priorities: maximizing employment and keeping prices in check. How to balance those competing mandates, however, comes down to an art as much as a science.
Consider the speech Tuesday by self-described “inflation hawk” Richard Fisher, president of the Dallas Fed, and one of the three policy dissidents. To hear Fisher tell it, the Fed’s latest effort to goose the economy is worse than doing nothing.
Operation Twist, announced earlier this month, will shift $400 billion on the Fed’s balance sheet from short-term to longer-term securities. The idea, in part, is to keep mortgage rates low, supporting a housing market that shows every sign of dragging down the economy for years to come.
In Fisher’s view, to the extent the Fed plan suppresses long-term rates, it could have the negative effect of undermining bank profits. Further, by taking any action, the Fed stands to hurt confidence. Consumers were nervous enough already before this latest central bank maneuver gave them reason to believe the economy is, as he put it, “in worse shape than they thought.”
What should the Fed do? It’s mostly been there and done that, he said. “I wouldn’t say we’re out of bullets,” Fisher said, but whatever ammo is left “we need to deploy very, very carefully.”
The Chicago Fed’s Charles Evans, one of the seven policymakers in the majority, thinks the central bank needs to keep shooting.
In a meeting with the Tribune editorial board Wednesday, Evans said the Fed could head off premature concern about future tightening of monetary policy by issuing clearer guidance linked to certain economic benchmarks. The Fed could, for instance, commit to accommodative money policy until unemployment goes below 7 percent from its current 9.1 percent, or inflation goes above 3 percent from its current 2 percent.
Evans also wants the committee to consider making asset purchases on a month-by-month basis, if benchmarks aren’t being met, with the amount set during each Fed meeting—an incremental version of the quantitative easing programs known as QE1 and QE2 that worried inflation hawks such as Fisher.
The slowing economy calls for more accommodation, Evans said. “I’m a little more willing to experiment.”
Nothing Evans has in mind would be revolutionary, but the division among policymakers illustrates how no magic bullet exists for fixing what ails us economically. The U.S. still suffers from the aftermath of its 2008 financial meltdown, and a huge overhang of public and private debt.
At least, unlike Congress, the Fed policymakers air their differences in a civil tone. “Each of us lays out our arguments calmly, with great respect for each other and without acrimony,” Fisher said.
Evans confirmed that Fed discussions haven’t descended to the nyah-nyah level of discourse common among federal lawmakers. And Evans, like Fisher, also agrees that Congress needs to take the tough steps to bring federal spending and revenues in line — addressing the budget deficit and national debt. An agreement “could be extraordinarily helpful,” Evans said. “We will stand up and applaud.”
Maybe the Fed’s onto something after all.
