Is Fed to blame for slow recovery?
The central bank has a tall order in the wake of the financial crisis, and its track record is far from perfect.
By Jeff Reeves, editor of InvestorPlace.com
Washington’s biggest problem right now isn’t the barely civil debate over the deficit or the looming deadline over the nation’s debt ceiling. Spending issues are surely a headache, but they probably don’t even make the top three behind the interrelated economic issues of the day – inflation, unemployment and general distrust of the Fed.
Many believe the Federal Reserve has failed in its dual responsibilities of controlling inflation and maximizing employment, and the institution is starting to feel the heat. And if the conversation in Washington doesn’t change back to economic issues like inflating gas prices and a stubbornly high unemployment rate, both Barack Obama and Ben Bernanke will be in deep trouble.
But is it fair to blame the Fed chairman for the mess we’re in, or the president for appointing Bernanke to a second term?
First, it’s worth pointing out the basis of those two goals – controlling inflation and bolstering employment – is from an amendment to the Federal Reserve Act in 1977. The amendment requires Fed officials "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Those are difficult tasks in fairly normal markets, and the events since the Financial Crisis of 2008 have been anything but normal.
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It would be unfair to let the Fed and Big Ben off the hook simply because of their daunting obligations in the face of crisis. The monetary policy of the Fed has been justly maligned for its early efforts to inject capital into the banking system – money that struggling banks chose to simply hoard at the height of the crisis instead of in turn pumping it into the economy and getting things moving. By most accounts, the first quantitative easing campaign failed to significantly improve things -- though whether things would have been significantly worse is a matter of opinion.
As for whether the second round of quantitative easing has helped anything, the jury is still out, as the increase in money supply began in late 2010 and is still under way. When it is done, the central bank will have purchased $600 billion in bonds over eight months. The move will bring down longer-term interest rates in an effort to stabilize the economy and to encourage investment and spending.
But just as there are some people who think the Fed is going overboard, some have argued the Fed isn’t doing enough with "just" $600 billion in purchases. After all, the first round of quantitative easing at the height of the financial crisis tallied nearly $1.5 trillion in bad mortgage debt and government bonds. A slight drop in mortgage rates won’t have a significant affect on the battered housing market. And while ultra-low rates may help drive down the dollar and boost exports, this trend is inevitable, and the second Fed move only makes it likely sooner rather than later.
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It’s also worth noting that many critics are far more general in their distrust of the Fed. Some are fair and honest citizens who just want to correct the central bank's lack of transparency, and they rightly point to previous missteps that inflated asset bubbles and contributed to previous economic crises as well as stabilization after other times of crisis.
Of course, some are fringe groups with a clear agenda but a clouded understanding of the institution or economic theory in general. While some vitriol has bled into the debate – mostly about the central bank's being bent on stealing from the American people to enrich a cabal of evil investment-banking puppeteers – the core complaint that the Fed must be more open and accountable resonates widely.
So unless the Federal Reserve becomes more transparent, it doesn’t matter if it has limited tools at its disposal or that it has been doing the best it can in a time of crisis. The lack of confidence in the central bank is reason enough for concern, and until the public feels there is proper oversight, the Fed and its chairman will be pretty unpopular.
The only question is whether Bernanke can change public perceptions before his next confirmation hearing in 2014 – or whether Obama will feel the pain first in his campaign for a second term in 2012.
The FED's rates have cost many income from savings now the savings is gone thus there will never be income from the savings.
Spending drives our economy. The FED's rates have destroyed savings/spending for years to come.
The FED's rates are to help save the banks not create jobs.
A decade of the FED's rates has not created jobs it has destroyed savings/spending for years to come.
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