Aspiring journalists are often advised to become multilingual so they can cover more stories. That’s why I’m prepared to offer the first summer program in Federal Reserve as a Second Language … once anybody turns up who can really understand it. Any attempt to translate the Fed’s latest announcement could wind up sounding like the Hungarian/English phrasebook in that old Monty Python sketch, the one where the customer tells the shopkeeper, “My hovercraft is full of eels.”
The gist of the Fed’s statement today was this: “We’re surprised that things are this bad and we realize we were wrong, but we have no immediate plans to change anything. (Although we might – someday).” The Fed then added: “We’re failing at the jobs part of our dual mission … and we expect to keep failing for a long time to come.”
Markets rebounded at the news.
The Fed’s done a lot of unusual things in the last couple of years. It has used public communication to manipulate markets in unprecedented ways. It has bought up extraordinary assets, dropped its rates to zero, flooded banks with rescue money, and even allowed companies that weren’t banks to become banks so they could be rescued. (Goldman Sachs to The American Taxpayer: Hey, thanks, folks! I owe ya one!)
That’s why it’s surprising and disappointing that none of the Fed’s innovations have been directed at the ongoing crises of unemployment, wage stagnation, and consumer spending. They’re the root causes of the problems that seem to keep the Fed perpetually perplexed and disappointed.
We’ve got our phrasebook in hand. Let’s get to work.
When the Fed says growth is “considerably weaker” than expected, rather than “somewhat weaker.” it means: Things have really gone to hell. When it says there’s “deteroriation” in the labor market where once it was merely “weaker than expected,” they mean: Holy crap! And when it says the housing sector “remains depressed” the Committee means: You don’t need a realtor, Mr. and Ms. Homeowner, you need an arsonist.
What about jobs?
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability.”
Translation: A lot of times we forget to even mention this part of our job. See? We mentioned it!
“The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.”
Translation: We got it wrong, and things are worse than we thought. But we’re not going to do anything about it, so we’ll be failing at this part of our job for a long, long time.
And the monetary outlook?
“… the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent … The Committee currently anticipates that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”
Translation: These zero and zero-ish rates were supposed to be an emergency measure to rescue the banking system in 2008. But we’ve decided to keep it on life support for a long time to come. That hasn’t created any jobs, and we’re sorry about that, but it should inflate the market a bit.”
“The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.”
Translation: We talked about a lot of things we could do … and aren’t doing right now.
“It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.”
Translation: The greatest jobs crisis in a generation doesn’t call for pulling out every tool in the tool box.
But if this isn’t the time to do everything you can, when will it be the right time? If that’s your thinking, then what does “as appropriate” really mean? That’s easy to translate. For the millions of people who can’t find work or are struggling to pay their bills, it means Your hovercraft is full of eels.
What could the Fed do?
We’re constantly being told that the Federal Reserve is limited in its ability to respond to the ongoing crisis. But we didn’t hear that kind of talk in 2008, and there’s nothing in the Fed’s charter that precludes it from taking more aggressive and innovative action. What could the Fed do?
Joseph Gagnon at the Peterson Institute of International Economics has some smart suggestions.for action the Administration – and the Fed – can take the need to ask permission from the obstructionists in Congress. Gagnon proposes an aggressive third round of quantitative easing, accompanied by “a clear statement that more is forthcoming if the economy continues to underperform.” A a small additional step, the Fed could stop paying interest on the reserves it holds. While this wouldn’t have a dramatic effect, it would remove an incentive for not lending money.
Gagnon also proposes that the Administration use its control over Fannie and Freddie to aggressively provide debt relief to homeowners. (The Administration’s own program, which is limited to distressed mortgages, continues to be a disaster.)
There’s more that the Fed could do if it really wanted to fulfill its dual mandate. It could link those zero-interest rates to consumer debt relief, especially for underwater loans. It could build the framework for an infrastructure development lending program.
Once the translating’s done, the Fed sounds like nothing so much as a world-weary cop trying to keep the frightened citizenry away from the scene of a disaster. The Committee’s members are trying to reassure everybody that things will be fine. They’e saying everything’s under control., when they really don’t know that for sure. They’re saying Move along, folks. There’s nothing to see here.
But like any crowd that’s witnessed a disaster, everybody watching knows that’s not true.