The Fed Speaks Softly, Carries a Big Economic Responsibility
- Jan 10, 2008
Speaking today for the first time since the Fed’s last meeting, Federal Reserve Chairman Ben Bernanke implied a further rate cut might be en route.
U.S. stocks bounced up midday Thursday on anticipation Bernanke’s comments would suggest more rate cuts–but stocks faltered after the actual remarks were made as investors struggled to interpret what they meant, according to MarketWatch.
To be fair, Bernanke’s comments were–as usual–a little vague. In a speech to the Women in Housing and Finance and Exchequer Club in Washington, D.C., he basically said the Fed was concerned about oil prices, housing issues and other threats to the economy–and would be carefully watching and ready to act quickly.
But at what point would a Fed "action" happen? And what exactly would that action be?
Concrete statements aren’t really Bernanke’s strong suit, as The New York Times pointed out today in an article debating Bernanke’s assertiveness.
Bernanke is known for making somewhat vague statements, such as "incoming information on the performance of mortgage-related assets has intensified investors’ concerns" (Nov. 8, speaking to Congress’ Joint Economic Committee) and "a full recovery of market functioning is likely to take time and we may well see some setbacks" (giving remarks to the New York Economic Club on Oct 15).
The Times article questioned whether Bernanke needed to be more like former chairmen Alan Greenspan and Paul A. Volcker, who heavily influenced their colleagues, or whether he was just too nice for the job.
He certainly has the know-how–Bernanke is a former presidential chief economic adviser, Princeton University economics professor and policy failures expert. It’s possible he just needs a bit more time. He has, after all, only been the Fed Chairman for two years; and–at least considering the national housing situation–what a two years that has been.
The main criticism of Bernanke involves his–and the Fed’s–hesitation to cut rates. They waited out the summer, finally chopping the benchmark interest rate by a half point to correct for the housing and credit crunches in September. The reduction was the Fed’s first cut in four years–way past when many had expected one would come.
But if that’s the main beef about Bernanke, critics might want to consider the fact the Fed has since made up for lost rate cut time, trimming the federal funds rate in October and December–and it’s had little effect.
The economy has been on edge for months, fearing an impending recession. Well, sadly, the worrying may be over: Several sources say we may already be in one. Merrill Lynch & Co. economist David Rosenberg said Monday that "Friday’s employment report confirmed our suspicions that the economy was transitioning into an official recession towards the end of last year."
Goldman Sachs said Wednesday that it expects gross domestic product to drop, indicating a recession, in the second and third quarters of 2007, The Financial Times reported today.
Some experts, the Times reports, are suggesting other methods of economic help–low-income family tax rebates, longer unemployment insurance or other ways to boost consumer spending, which was down this holiday season.
Previously owned home sales fell more than forecast in November, according to the National Association of Realtors, indicating that cutting rates also has failed to consistently ignite home purchases.
So should we really be all that upset Bernanke waited to do it?
And what should the Fed do next to offset the factors dragging the economy down? Tell us what you think.