More than three years after it hit bottom in 2009, the U.S. economy is still stuck in the mud. With Congress and the White House paralyzed by election-year politics, Federal Reserve Chairman Ben Bernanke seems the only person willing (or in a position) to do something.
In this instance, his actions might best come in the form of words.
It doesn’t take an economist to realize the recovery has lost momentum. Fed officials expect the economy to grow at a rate of just 2.1 percent in 2012, far too slow to make a significant dent in unemployment. The longer the slump lasts, the more permanent damage it will do, as idleness erodes the skills and motivation that would allow people to return to work.
Unfortunately, the Fed’s arsenal is losing its potency with each new application of stimulus. Economists at Goldman Sachs Group Inc. estimate, for example, that a third round of the bond-buying known as quantitative easing would have less than two-thirds the effect of the last round. Lower interest rates simply don’t flow through to many consumers, because banks want to lend only to people with sterling credit. Also, some Fed officials worry that further purchases of Treasuries could distort the market and undermine the intended effects.
In their search for better ideas, some Fed officials are looking across the Atlantic, where the Bank of England is trying a new tactic to push money through to consumers and businesses. Its Funding for Lending Scheme offers credit to banks at interest rates that decline as the recipients’ lending increases. The central bank says its program could boost credit to companies and households by at least $124 billion.
Such a program isn’t likely to work well in the U.S. Banks already have plenty of cheap cash, which they could lend if they wanted. Goldman Sachs estimates that U.S. bank-funding costs are about a full percentage point lower than those in the U.K. In fact, U.S. institutions have parked more than $1.4 trillion in excess reserves with the Fed, partly because the central bank pays interest on it.
Still, the Fed does have one option that would provide some stimulus without requiring it to take on credit risk or purchase more securities. Bernanke can make an unequivocal promise to keep interest rates low for a long period -- say, through 2015 - - no matter what happens in the economy. Known as “forward guidance,” this would go one step further than what the Fed did in January when it said it intended -- but did not promise -- to keep rates low through 2014.
The concern, of course, is that such a pledge could tie the Fed’s hands if the economy suddenly gained momentum and started to overheat. Current economic indicators, though, suggest the risk of that happening is very low. Bernanke himself called the pace of job creation “frustratingly slow” and warned that consumer confidence remains depressed amid worries about employment and wages.
The economy needs help. Until officials in Washington get their act together to provide fiscal stimulus, the Fed will need to deploy its limited arsenal. Giving markets confidence that interest rates will stay down for the foreseeable future would be a good way to help keep the recovery going.
Today’s highlights: the editors on why politics should continue past the water’s edge; Caroline Baum on who pays taxes in the U.S.; Edward Glaeser on how the U.S. can be more like Sweden and less like Greece; Michael Kinsley on positions that will prove embarrassing in 20 years; Ezra Klein on no easy answers for campaign finance; Steven Greenhut on San Francisco’s arrogant claim to Yosemite’s water.
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