Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.
Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly.
Mark Thoma thinks that fiscal and monetary policy should be used more aggressively, citing this David Leonhardt column in the NY Times. Leonhardt's column is worth quoting at length as it pretty succinctly describes the feeling that has been building in my mind and I'm sure in others over the first half of this year.
Ben Bernanke believes that he and his Federal Reserve colleagues have the ability to lift economic growth at their meeting this week. The Fed, he has said, "retains considerable power to expand aggregate demand and economic activity, even when its accustomed policy rate is at zero," as it is today.
Mr. Bernanke also believes that the economy is growing "not fast enough," as he recently put it. He has predicted that unemployment will remain high for years and that "a lot of people are going to be under financial stress."
Yet he has been unwilling to use his power to lift growth and reduce joblessness from near a 27-year high. Instead, Fed officials are expected to announce on Wednesday that they have left their policy unchanged, even if they acknowledge that the economy has recently weakened.
How can this be? How can Mr. Bernanke simultaneously think that growth is too slow and that it shouldn't be sped up? There is an answer -- whether or not you find it persuasive.
Above all, top Fed officials are worried that financial markets are fragile. They are not so much worried about inflation, the traditional source of Fed angst, as they are about upsetting the markets' confidence in Washington. Yes, investors remain happy to lend the United States money at rock-bottom interest rates, despite our budget deficit and all of the emergency Fed programs that will eventually need to be unwound. But no one knows how long that confidence will last.
In effect, Mr. Bernanke and his colleagues have decided to accept an all-but-certain downside -- high unemployment, for years to come -- rather than risk an even worse situation -- a market panic, a spike in long-term interest rates and yet higher unemployment. As the last few years have shown, market sentiment can change unexpectedly and sharply.
If you fear that the recovery is about to stall, today's news on new home sales probably increased your worries. And in the midst this, an FOMC member, Hoenig (Kansas City), dissented from the consensus opinion, believing "that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee's flexibility to begin raising rates modestly."
Hoenig and Bernanke have similar concerns about stability. Hoenig is of the opinion that keeping rates low will lead to risks to that stability. Bernanke seems to be hoping that they can maintain the low rates, but seems to be drawing the line at providing any further support like, say, buying long-term bonds and pushing those rates down as well.
But what if GDP stalls in the 2nd half of 2010? Do you pull the trigger and use unconventional monetary policy? What is worse, another year of 10% unemployment or instability in the financial markets? If you wait too long to decide, will you get both?
The person in the big chair has to make that decision, and for now he's content to sit on low short-term rates, even if that makes it hard to reverse course later. And he's keeping his powder (what little remains of it, at least) dry.
As it seems to me that price pressures seem to be even more muted right now than 6 months ago, I would want to be ready to do something unconventional in case Congress has a fit of anti-deficit hysteria at the same time GDP stalls and unemployment edges back up. We do not have to repeat past mistakes.
The 2nd half could go either way, but I'm a little more pessimistic today than a month ago.
On a related note, Bill Conerly thinks that the Fed has actually been doing a little quantitative tightening, but thinks they should continue easing. Connerly sees tightening in the slight reductions lately in bank credit, slower growth of M2, and decline of MZM. Maybe these are just short-term aberrations, but they are worth noting. Eventually these quantities should return to a more normal trend reflecting a neutral stance, but now is not the time for that yet. If we see this continue for a couple more months, I would be concerned about this apparent stealth tightening. Stay tuned.
Well written constructive thinking. Thank you.
Admittedly, I write a blog that's pretty close to ground level when it comes to regular folk in this country, and as I hear from hundreds of my readers each month, it's worrisome to me that I may be hearing too much from one segment of the population. Additionally, I've seen and hopefully to some degree understood the difficulties and dangers that exist where economics and politics collide. That being said, I'm at a loss to understand the Fed's current stance, which does appear reminiscent of Dr. Doolittle's "Push-Me-Pull-You." But, its the administration's position, or rather the lack of any clear public position on the issues affecting so many millions of Americans, that has me feeling nothing short of lost.
What exactly is a "jobless recovery?" And how is it possible to see a return to economic growth while the foreclosure crisis continues to drain billions from the balance sheets of everyone involved... from homeowners to banks? I understand that we have suspended all common sense as far as accounting principles for financial institutions is concerned, but don't we have to account for looses at some point. The argument that we can't expect banks to account for losses now because to do so would render them insolvent, only means they are insolvent, no?
The political cost of allowing millions to lose homes, while watching bankers take home record bonuses, means alienating so many millions of American voters and seems to me to guarantee future political instability. I suppose the RNC may fail to produce a candidate, but is that to be depended upon? I've started to worry that the shame involved in losing a home that continues to make the crisis a relatively "quiet" one, is actually leading our elected representatives to believe that there will be no cost to their apparent failures and continued inaction.
Am I wrong to think that more must be done to stabilize the real estate markets before we will see, or rather feel, any stabilization in our economy?
Oh, one more thing... I just discovered and very much enjoy your blog. I'll be adding a link to it from my own, and recommending it to others. Thank you...