What Bernanke and the Fed won't be doing to stimulate economic growth
By Neil Irwin
I wrote last week about what actions the Fed would consider taking if the economic recovery continues losing steam. In reporting that story, I also vetted some other actions the central bank might take to try to support growth -- but concluded they are not viewed within the Fed as desirable options, for a variety of reasons.
So here are the things the Fed probably won't be doing to try to strengthen the economy, and why.
Endorse more fiscal stimulus. Chairman Ben Bernanke gave crucial momentum to fiscal stimulus actions in early 2008 and early 2009 with his backing. He could put his credibility to use and prod Congress toward taking more action to boost growth. He even has a high-profile venue at which to do it with his semiannual monetary policy testimony next week.
But don't hold your breath. Bernanke, to the degree he wades into fiscal policy at all, has been urging Congress to work to reduce the long-term budget deficit in recent months. That isn't necessarily inconsistent with more short-term economic stimulus, and in fact Bernanke has suggested that he's OK with short-term simulus if it is paired with long-term deficit reduction. ("If you decide to do more fiscal stimulus," Bernanke told the House Budget Committee last month, "it would be very helpful to combine that with . . . with a plan for the fiscal exit strategy.")
But Bernanke is unlikely to come out and explicitly endorse short-term stimulus, for two reasons. The first is that he views fiscal policy as the province of Congress and the president, and just as he expects them to keep their fingers off monetary policy, he doesn't want to get in the mix of tax and spending decisions. The second reason: Even if he delivers a nuanced message that short-term stimulus should be combined with long-term deficit reduction, when that is translated into newspaper headlines and politicians' talking points, it would likely translate to the more simplistic "Bernanke endorses stimulus." His predecessor, Alan Greenspan, experienced that in 2001 when he testified in favor of the Bush tax cuts, but with the caveat that the cuts should have triggers so they might be eliminated if expected budget surpluses did not materialize. His comments were widely interpreted as a more general endorsement of the tax cuts, which were passed without any such triggers, and the budget deficit soared.
New unconventional lending programs. New York Times columnist Paul Krugman mentioned "buying private-sector debt" as a tool the Fed could use to stimulate the economy. Goldman Sachs economists have mentioned the idea of a "TALF-like structure," combining Fed and Treasury resources to buy private assets. (TALF is the Term Asset-Backed Securities Lending Facility, a Fed program to prop up lending markets launched during the crisis). Neither is under serious consideration.
The Fed can buy corporate bonds or other private assets only by using its emergency lending powers, known as 13(3) for the section of the Federal Reserve Act that authorizes it. The central bank turned to this power repeatedly during the financial crisis, but it has limits: It can be invoked only in "unusual and exigent" circumstances and when other credit is unavailable. In other words, so long as markets are functioning reasonably normally, as they are now, the Fed doesn't have the authority to intervene; it's hard to argue that a mere desire to push down various interest rates qualifies as "unusual and exigent" circumstances.
In other words, don't expect to see the Fed buying corporate bonds or other private securities unless there is a breakdown in market functioning, as opposed to weak economic conditions.
Cutting the discount rate. Back in February, the Fed raised the rate it charges banks for emergency loans at its discount, to 0.75 percent from 0.5 percent, as part of its exit strategy from unconventional policy enacted during the crisis. It could reverse that action and lower the rate.
But it's not clear that cutting the discount rate would do any good for the economy; banks just aren't using the discount window now -- only $41 million was outstanding at the discount window last week, down from $35 billion the same time last year. Fed leaders view tweaks to the discount rate as a tool to help market functioning during periods when bank liquidity is the problem, and that just isn't the case now.
One caveat to all of this: If the economy enters a true double-dip recession (as opposed to just a sluggish recovery), all bets are off. If there's one thing we learned about the Bernanke Fed during the last three years, it's that if things get bad enough, it is willing to throw out the playbook.
Posted by: Lonepine | July 15, 2010 12:39 AM | Report abuse
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