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An activist Fed vs. a do-nothing Congress

September 13, 2012|By Jon Healey
  • Ben Bernanke, chairman of the Federal Reserve Board of Governors, answers questions after the Fed announced a third round of quantitative easing.
Ben Bernanke, chairman of the Federal Reserve Board of Governors, answers… (Alex Wong / Getty Images )

This score just in: QE:3, Congress 0.

The Federal Reserve Board of Governors announced Thursday that it was launching a third round of "quantitative easing," a technique aimed at spurring lending and economic activity by purchasing bonds from banks. Unlike the two previous rounds, however, the Fed put no time or dollar limit on QE:3. Instead, it plans to buy $40 billion worth of "agency mortgage-backed securities" (packages of loans created by Fannie Mae and Freddie Mac) each month, along with about $45 billion in monthly exchanges of shorter-term debt for longer-term debt, until the employment situation improves "substantially."

There appears to be no precedent for such an open-ended commitment to inject money into the economy. But as Fed Chairman Ben Bernanke has noted several times in the last two years, Congress isn't doing anything to help matters. The Fed is on its own, and it's already pushed short-term interest rates effectively to zero.

We can only speculate about what Bernanke, an economist and scholar of the Depression, would be doing if lawmakers were busily cranking out jobs bills, deficit-reduction plans or other measures to spur the economy. He's said several times that the Fed has limited ability to promote growth, and Congress has much more powerful tools. But Congress isn't using them, and Bernanke has shown little willingness to sit around while growth remains glacial and the unemployment rate stays stuck above 8%.

Wall Street traders greeted the QE:3 announcement enthusiastically, driving the Dow Jones industrial average up more than 200 points. Some Congressional Republicans weren't so sanguine, warning that the Fed is accumulating a dangerously large amount of securities and risking a damaging increase in inflation.

That's usually what happens when the Fed injects so much money into the economy. Under quantitative easing, the Fed basically prints the money it uses to buy bonds. The goal of the purchases is twofold: to reduce the interest rate for mortgages by increasing demand for securitized versions of the loans, and to encourage banks to make more loans by adding cash to their balance sheets. But all those extra dollars could reduce the value of U.S. currency relative to commodities, which would cause prices to rise.

GOP presidential candidate Mitt Romney has previously said that he'd rather have a Fed chairman who wasn't so quick to intervene in the economy. On Thursday, his campaign blasted the latest Fed move while blaming President Obama, not Bernanke.

"The Federal Reserve’s announcement of a third round of quantitative easing is further confirmation that President Obama’s policies have not worked," Lanhee Chen, the campaign's policy director, said in a news release. "After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn’t need more artificial and ineffective measures. We should be creating wealth, not printing dollars."

Regardless of what the country needs, the only institution that seems capable of acting is the Fed. And on Thursday, it did so dramatically, for better or for worse.


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Follow Jon Healey on Twitter @jcahealey

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