The Fed at Bay

Just a very quick note about two aspects of the Fed’s announcement on interest rates today.

First: it is obviously worried about the economy. Very much so. Enough to announce that it will be keeping rates unchanged until at least 2013 – or as long as the economy stays this weak, which from my perspective amounts to the same thing. Duh. On the surface this is a clear signal of intent to combat malaise. To tell the market that rates will stay at the current lows for two more years is a profound signal. Or it ought to be. It lets everyone plan. It removes uncertainty. It ought to shock. I am left a little skeptical, though, mainly because nowhere in the Fed’s release was there much hint of other measures in the pipeline. That is unfortunate, because the economy could do with a big dollop of help right about now. In the absence of any sensible fiscal policy, and in view of the weakness of the economy, the Fed is being forced further into uncharted waters. Still, doubts aside, I am glad it is prepared to go there.

But.

Second: there is obviously great disagreement within the Fed about basic economic matters. Three of the governors, the usual gang of hawks, who objected publicly to the use of the specific time period for interest rates. These hawks, who have been wrong consistently about practically everything since the crisis first hit, are sticking to the tired and discredited theory that pumping the economy full of cash will inevitable lead to higher inflation. Note the word “inevitably”. The causal connection may, or may not, be there under normal circumstances, but it is absolutely not there in our current near depression circumstances. We are bang up against a zero interest rate boundary that invalidates normal theory. Instead it invokes the need for alternative ideas which, fortunately, the other seven governors have embraced, albeit cautiously . Still, the vocal opposition to the Fed’s new direction from the hawks, represents the strength of the old ideas and mimics the position taken by the extremists in Congress who advocate the equally discredited supply side notions and austerity policies that are undermining the recovery.

When you have an element of your leadership actively engaged in advocacy of policies that will disrupt and harm the economy you are partially crippled. It makes it harder to marshal the public behind the kind of bold action we need to avoid outright depression and a long term malaise.

We are well and truly limping at the moment. Hobbled and without leadership capable of putting in place the policies to solve the crisis.

But at least the Fed, or at least the seven governors who supported today’s action, are trying a wee bit. Which is much, much, more than we can say for the cowards in the White House and the extremists in Congress.