Rescuing the U.S. Economy
Last week, the Federal Reserve adopted an open-ended bond-buying program of $40 billion a month to goad the economy into faster growth. But even before the announcement, there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months. The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year.
Fed Chairman Ben Bernanke explained what the Fed hopes will happen. By buying mortgages, the Fed would push interest rates down. They're already low (3.6 percent in August for a 30-year fixed-rate mortgage) and would fall further. Lower rates would stimulate more homebuying and construction. Greater housing demand would raise home prices. Fewer homeowners would be "underwater" (homes worth less than mortgages). Banks would refinance more existing mortgages at lower rates because the collateral -- the homes -- would be worth more. Feeling wealthier, homeowners would spend more and cause businesses to hire more.
Good news would feed on itself. The brighter outlook would boost stock prices (the Dow jumped 206.5 points the day of the Fed's announcement). This rebuilds Americans' depleted wealth. Optimism, consumer spending and hiring would revive even more. The Fed announced a new round of Quantitative Easing (buying Treasuries in order to force people into riskier assets), but unlike previous rounds, this one is not fixed by some end date. Instead, the Fed will buy $40 billion worth of Mortgage-Backed Securities every month until the labor market improves substantially.
This is a radical change from previous forms of QE, because the Fed is committing itself to future actions: The easing will continue until morale improves, one might say. Here Bernanke is doing two things: He's saying the Fed is specifically focused on fighting unemployment (There's very little mention of inflation anywhere) and he's also joining the vanguard of the economics profession, which has an increasingly growing arsenal of datapoints to suggest that promises about future easy policy are more powerful than mere bond purchases.
The press conference number one question that everyone wanted to ask Bernanke was: What does "substantial" improvement in the labor market mean? If the Fed is saying it will keep money easy until it sees this kind of improvement, and if this commitment is going to have any meaning, then we should be given some kind of idea about what the Fed sees as substantial. Indeed this was a big question, that was asked in multiple ways by multiple reporters. Bernanke didn't have a real concrete answer to this question, but he came pretty close. In response to a question from WSJ's Jon Hilsenrath he made clear that the last six months of job gains weren't anywhere close to being satisfactory.
In response to a question from NYT's Binyamin Appelbaum about why the Fed didn't specify some kind of specific unemployment target, Bernanke replied that that number alone wasn't satisfactory. After all, last month, the unemployment rate dropped from 8.3% to 8.1%, but much of that was due to declining workforce participation, which is not that the Fed wants to see. And even then, he said the Fed hadn't "yet" come to a specific number on economic improvements, suggesting that more clarity on the economic goals front could be forthcoming. Later, when asked by a German reporter a question that was essentially "what about inflation?" Bernanke dismissed it, saying that this was not really an issue and that the economy was not in any danger of overheating. Essentially, Bernanke has pushed the Fed in a major tilt towards a major focus on the real problem with the economy -- unemployment -- at a time when there's major policy pushback to do the opposite.
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- Joanne Loftus