THE LIMITS OF FED POLICY / THE NEW YORK TIMES EDITORIAL ( A MUST READ )

Editorial

April 27, 2011

The Limits of Fed Policy

For too long policy decisions by the Federal Reserve were cloaked in secrecy and Alan Greenspan, the longtime chairman, was notoriously Delphic. So it was good to see the current chairman, Ben Bernanke, meeting the press on Wednesday, in the first of what are to be quarterly question-and-answer sessions. It shows that the Fed has learned, albeit the hard way, that it must build understanding and support for its policies.

For all the talk, there is little Mr. Bernanke can say, or do, to alter today’s grim economic realities. The tools the Fed has to raise or lower interest rates, are not, by themselves, going to fix what most ails the economy today: continued high unemployment; falling home prices; weak income growth; the erosion of the manufacturing sector.


Only fiscal policy can directly address those crushing problems. That requires Congress and the White House to agree on ways to raise and invest taxpayer dollars for specific programs, projects and recovery efforts.


That is not to imply, as Fed critics contend, that current Fed policy has failed. Its most controversial action — a $600 billion bond-buying program intended to keep long-term interest rates low — has succeeded in preventing a deflationary spiral and has correlated with more robust job growth. The Fed’s decision on Wednesday to continue the bond-buying program as scheduled through June, together with its decision to keep interest rates near zero for the foreseeable future, represent sensible support for a still fragile economy.


So long as fiscal policy is off the table, the economy is likely to limp along for years. The White House has some good ideas, including proposals to boost educational achievement and, importantly, to raise taxes for needed spending. A bipartisan group of senators have recently proposed creating an infrastructure bank to lend out seed money — and attract private capital — for major public works projects. But most Congressional Republicans are fixated solely on cutting federal spending as quickly as possible, and have successfully dominated debate and policy-making.


In his press conference, Mr. Bernanke emphasized the need to control the long-term budget deficit. Just as clearly, he emphasized that the best approach would be to enact a credible plan soon — to be implemented over time. If only Congress would take heed.


It is important that the Fed not prematurely raise interest rates or otherwise tighten its policy. The Fed’s ability to boost economic activity is limited. Unfortunately for now, monetary policy is the only game in town.