What Will Become of the Federal Reserve?
Felix Salmon has a smart post analyzing the meta-message of Ben Bernanke's testimony this morning. Bernanke, Salmon notes, "starts with 7 paragraphs on general economic conditions, continues with five more paragraphs on the state of the financial sector, and then has six important paragraphs on fiscal policy." That's a bit strange: Fiscal policy is the Treasury Department's domain. The Federal Reserve is the home of monetary policy.
But there's no monetary policy left. Bernanke has brought interest rates as low as he can bring them. He fired all the bullets in his gun. It wasn't enough. That's why the Federal Reserve moved into direct purchasing of securities earlier this year (in this analogy, I guess "quantitative easing" is hand-to-hand combat). That was the appropriate maneuver, most think. Some credit it as the single most important policy intervention in the past two years. The question is if the Fed's extreme maneuvers will become part of its everyday arsenal. "It’s a little disconcerting to see the Fed chairman talk so freely about fiscal policy," concludes Salmon. "Now we’ve reached this point, it’s going to be hard to stop him talking this way, even after the crisis is over."
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