The Federal Reserve says it will sell $400 billion of its shorter-term securities to buy longer-term holdings, its latest effort to boost a weak economy.
The Fed’s move to rebalance its $2.87 trillion portfolio could lower Treasury yields further. Ultimately, it might reduce rates on mortgages and other consumer and business loans.
The Fed also said it will reinvest its holdings of mortgage-backed securities, which would help keep mortgage rates at super-low levels. The Fed had previously reinvested the interest and principal into Treasury purchases.
Fed policymakers announced the moves Wednesday after a two-day meeting. Three members dissented from the decision.
“The actions the Fed has taken are helpful,” says Josh Feinman, global chief economist at DB Advisors. “They will help hold down long-term rates, but they’re no panacea.”
Stocks fell immediately after the announcement. The Dow Jones industrial average dropped 100 points. The yield on the 10-year Treasury note tumbled, and its price rose.
In its statement, the Fed noted that the economy is growing slowly, unemployment is high and housing remains in a prolonged slump.
As a result, the Fed has directed the New York Fed to purchase Treasurys with remaining maturities of six to 30 years, and to sell an equal amount of securities with maturities of three years or less.
Many analysts have said the shift in the Fed’s portfolio could provide modest help by reducing borrowing costs and perhaps raising stock prices. Others say it won’t help and warn that the move could escalate inflation.
In June, the Fed completed a $600 billion bond-buying program that may have helped keep rates low.
Expectations that the Fed would expand its holdings of long-term securities, along with fears of another recession, have led investors to buy up U.S. Treasurys. Treasury yields have dropped in response.
Once the Fed announced last month that it would expand its September policy meeting from one to two days, economists have anticipated some new action from the Fed. Chairman Ben Bernanke had said the Fed was considering a range of options.
The central bank is under pressure to revive an economy that has limped along for more than two years since the recession officially ended.
In the first six months of this year, the economy grew at an annual rate of just 0.7 percent. The housing market remains depressed. The unemployment rate is 9.1 percent. In August, the economy didn’t add any jobs, and consumers didn’t increase their spending on retail goods.
Most economists foresee growth of less than 2 percent for the entire year. They say the odds of another recession are about one in three.
The Fed has offered its own bleak outlook. At its August policy meeting, it said the economy would likely struggle for at least two more years. As a result, it said it planned to keep short-term rates near record lows until mid-2013, as long as the economy remained weak.
The Fed’s move Wednesday came despite a rift within the central bank. Three members also dissented from the Fed’s decision at its August meeting — the most negative votes in nearly two decades. The three, all regional Fed bank presidents, have said the Fed’s policies may be raising the risk of high inflation.
Bernanke’s policymaking has also incited criticism from congressional Republicans and GOP presidential candidates. Some have argued that the Fed’s $600 billion bond-buying program, which ended in June, raised inflation pressures, weakened the dollar’s value against other currencies and contributed to a spike in oil prices.
On Monday, the four highest-ranking Republicans in Congress sent Bernanke a letter cautioning the Fed against taking further steps to lower interest rates. Their letter suggested that lower rates could escalate the risk of high inflation.
Texas Gov. Rick Perry, who is seeking the GOP nomination for president, has gone so far as to say Bernanke would be “almost treasonous” to launch more bond buying.
The Fed’s efforts to stimulate the economy through low rates are occurring at a time when Congress is focused more on shrinking spending.
President Barack Obama has proposed a $447 billion job-creation program made up mainly of tax cuts and public works spending. Obama also wants the richest Americans to pay higher taxes to help cut federal budget deficits.
Obama’s proposals face an uncertain fate in Congress. Republicans have dismissed his deficit-reduction plan and have focused on efforts to reduce spending and keep taxes low for everyone.
Whatever shred of doubt you may have harbored about the determination of congressional Republicans to keep the economy in the dumps through Election Day should now be gone.
On Tuesday, in advance of a key meeting of the Federal Reserve Board’s Open Market Committee to decide what to do about the continuing awful economy and high unemployment, top Republicans wrote a letter to Fed Chief Ben Bernanke.
They stated in no uncertain terms the Fed should take no further action to lower long-term interest rates and juice the economy. “We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy.”
They didn’t threaten to “treat him pretty ugly” — as Texas Governor Rick Perry told his supporters last month he’d deal with Bernanke if he “printed more money” between now and the election.
But the threat was there. “It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate.”
Translated: You try this, and we rake you over the coals publicly, and make the Fed into an even bigger scapegoat than we’ve already made it.
Top Republicans believe they can block all or most of Obama’s jobs bill. That leaves only the Fed as the last potential player to boost the economy. So the GOP will do what it can to stop the Fed.
After all, as Republican Senate head Mitch McConnell stated, their “number one” goal is to get Obama out of the White House. And that’s more likely to happen if the economy sucks on Election Day.
To say it’s unusual for a political party to try to influence the Fed is an understatement.
When I was Secretary of Labor in the Clinton Administration, it was considered a serious breach of etiquette — not to say potentially economically disastrous — even to comment publicly about the Fed. Everyone understood how important it is to shield the nation’s central bank from politics.
If global investors suspect the Fed is responding to political pressure of any kind, investors will lose confidence in the independence of the Fed and its monetary policies. Even if the pressure is to tighten the money supply and keep interest rates high, it’s still politics. And once politics intrudes, lenders of all stripes worry that it will continue to intrude in all sorts of ways. Lending to the United States becomes a tad riskier. As a result, lenders charge us more.
The Republican letter puts Bernanke and his colleagues in a bind. If they decide against another round of so-called “quantitative easing” to lower long-term rates and boost the economy, they may look like they’re caving to congressional Republicans. If they decide to go ahead notwithstanding, they’re bucking the Republicans and siding with Democrats. Either way, they’re open to the charge they’re playing politics.
Congressional Republicans evidently don’t care. They want Obama out, whatever the cost. Besides, they’ve never met a government institution they don’t mind trashing.
Why was Ben Bernanke so cautious in his much-anticipated-dud of a speech in Jackson Hole, Wyoming Friday morning? Could it be that, in part because of President Obama’s missteps, the Fed chairman is having trouble wrangling a consensus from the Federal Reserve’s Open Market Committee, the group of Federal Reserve district bank presidents and Board Governors who collectively determine U.S. monetary policy? For one solid clue, let’s return to the most recent meeting of the meeting, on August 9.
Responding in part to the turmoil that disrupted financial markets after Standard & Poor’s decision to downgrade U.S. credit, and in part to the increasing evidence that the economy was slowing faster than previously predicted, the Fed announced that it was committed to keeping interest rates at “exceptionally low levels… at least through mid-2013.”
Three members of the committee dissented from the decision. In a somewhat cryptic postscript, the official press release noted that “Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser… would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.” (Emphasis mine.)
The difference between “an extended period” and “at least through mid-2013″ might seem a picayune matter to most people. But it’s been 19 years since as many as three members of the Open Market Committee have dissented at the same time. In Fed terms, that’s at least a mild earthquake. Within the confines of this slender semiotic gap we can see new evidence of a major split between the Fed’s “hawks” and “doves,” as well as irrefutable proof of a crucial failure by the Obama administration to exert its influence on economic policy.
In Fed parlance, hawks are worried that low interest rates will lead to excessive inflation. Doves believe that inflation isn’t currently a threat, and taking measures to stimulate the economy and spur job creation should be a higher priority. By advocating for the term “extended period” instead of for a longer commitment, the dissenters were implicitly arguing that the Fed should be keeping inflation fears on the front burner, as well as sending a signal that any more ambitious, unconventional form of monetary easing should be strictly avoided.
Fisher, Kocherlakota and Plosser are all well-established as hawks — and some are stout critics of any government intervention in the economy (in 2008 Kocherlakota signed a petition opposing Obama’s stimulus). But that’s not the only thing that they have in common — all three are also presidents of regional Federal Reserve banks. And that’s an important fact to keep in mind when conducting amateur Kremlinology on how the Committee makes decisions.
Normally, the Committee is made up of 12 members. Seven are “governors” appointed by the president of the United States to 14-year terms. Five are presidents of the Fed’s 12 member banks, rotated into the Committee for one-year terms. But the bank presidents are carefully “insulated” from the political process. The directors of each bank choose their own bank president, and six out of nine of those directors are in turn chosen by the banks who make up the Federal Reserve system.
What does that mean? It means at least five of 12 FOMC members owe their allegiance primarily to the banking sector. The fact that three out of those five are currently the most hawkish members of the Committee is not an accident. Banks hate inflation.
But here’s where this story really goes off the rails. Two of the seats allotted to the Board of Governors are currently empty. Even worse, there are no outstanding nominations for those seats. This constitutes criminal negligence on the part of the Obama White House.
It’s not all Obama’s fault. He has already appointed three governors — Janet Yellen, Sarah Raskin, and Daniel Tarrullo (and he also reappointed Bernanke.) So his stamp is on four of the 10 curent members. And of course, one of his other nominees, the Nobel-prize winning economist Peter Diamond, ran into the same stone wall of opposition from Senate Republicans that has thwarted so many other Obama nominations and initiatives.
But if Bernanke’s cautious leadership derives in part because, as economist Justin Wolfers writes, he has only the support of a “slim governing coalition,” the fact that there are two vacancies on the Committee that should already be occupied by Obama nominees has got to be a major reason why. As Matthew Yglesias moaned earlier this month, “if it’s not possible to work something out, then there ought to be a partisan fight.”
Just letting the power to appoint people to the most important economic policymaking institution in the country languish isn’t an acceptable outcome. The single largest influence on President Obamas re-election prospects is the short-term performance of the economy, and the single largest influence on the short-term performance of the economy is the Fed.
This should be a campaign issue. Republican intransigence is preventing the President of the United States from appointing Federal Reserve members empowered to fulfill one crucial part of the Fed’s dual mandate — full employment. If Bernanke isn’t willing to be aggressive, one reason why is that he just doesn’t have the troops.
Peter Diamond, the Nobel Prize-winning economist nominated by President Obama to a seat on the Federal Reserve Board of Governors, couldn’t have picked a better time to announce that he was withdrawing from consideration for the position.
On Friday, the latest government jobs report indicated serious weakness in the U.S. labor market. The Federal Reserve’s dual mandate includes keeping inflation down and employment up. Diamond is an expert on labor market theory. With those facts in mind, one might reasonably think that the Federal Reserve would benefit from his expertise. But after sustained opposition from the GOP, led by Alabama Sen. Richard Shelby, Diamond is giving up.
And that, in a nutshell, is the state of economic policymaking in the United States. At a time when unemployment is the top economic and political priority, a Nobel Prize-winning expert in labor market theory can’t get a job for the government working on the problem at the institution that could have the most influence on the problem.
There is an immediate impulse, on the left, to blame Obama. If he didn’t have the guts to make a recess appointment, then why couldn’t the White House at least have made a bigger push for him? There’s something wrong with the fact that the strongest public presentation of his qualifications came in a New York Times opinion piece written by Diamond himself to explain why he should have been appointed.
The question of whether Obama should have made a recess appointment is tricky. One reason for Republican obstinacy comes directly from recent history. Senate Democrats blocked all attempts by George W. Bush to fill open seats on the Board of Governors in 2008, right in the middle of an economic catastrophe — and Bush did not make a recess appointment then. Recess appointments to the Federal Reserve Board of Governors are rare. In 1984, Ronald Reagan appointed Martha Seger to the Federal Reserve as a recess appointment and riled up Democratic senators enough that they passed a Senate resolution declaring that the Federal Reserve should be off-limits to such maneuvers. There’s also the problem that a recess appointment only lasts to the end of a Senate session. If you want to make a lasting impact on the Fed, you need to appoint someone who can eventually get confirmed.
But that doesn’t fully absolve Obama. Matthew Yglesias is on the money:
Back when Shelby was a lone voice holding Diamond up in the 111th Congress, there was no high-profile criticism forthcoming from the Senate Democratic leadership or the White House. No encouragement was given to outside progressive voices to write about this and no surrogates were dispatched in the press to try to put the nomination over the finish line. What’s more, by the time Diamond’s name was even put forward the seat in question had lingered vacant for over a year so it was difficult for the White House to argue that it was an urgent post. And yet it was an urgent post, and the administration should have acted with much more dispatch to put names forward and press the 111th Congress to confirm them. The moral blame for the Fed situation should rest with Shelby and monetary cranks like Ron Paul and Paul Ryan, but the administration has made serious tactical and strategic blunders here.
But let’s not go overboard on the Obama scapegoating here. Republican opposition to Obama’s appointments, at every level, has been unyielding to an extent unprecedented in historical memory. While it is definitely true that the White House could be making a bigger push for its judicial appointments, for Elizabeth Warren at the Consumer Financial Protection Bureau and everywhere else, it’s not at all clear that that would make any practical difference. The votes aren’t going to be there. At least half the blame for paralysis on the Fed front has to be placed on Shelby, who welcomed Diamond’s resignation by ,It would be my hope that the president will not seek to pack the Fed with those who will use the institution to finance his profligate spending and agenda.”
Match that rhetoric with Diamond’s own self-justification of his qualifications and decide for yourself who is more engaged with the challenge of devising the right economic policy for the United States at this juncture in time:
But understanding the labor market — and the process by which workers and jobs come together and separate — is critical to devising an effective monetary policy. The financial crisis has led to continuing high unemployment. The Fed has to properly assess the nature of that unemployment to be able to lower it as much as possible while avoiding inflation. If much of the unemployment is related to the business cycle — caused by a lack of adequate demand — the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural — caused by mismatches between the skills that companies need and the skills that workers have — aggressive Fed action to reduce it could be misguided.
A president who comes into office after a huge economic crisis that occurred on the watch of the opposition party ought to be able to make his own appointments to institutions such as the Federal Reserve. The fact that he can’t isn’t just another sign that government is broken now, but also a promise that it will be broken even further in the future, as Senate Democrats retaliate against whomever the next Republican president attempts to put into meaningful positions of power.
Nobel Prize-winning economist Peter Diamond is withdrawing his nomination for the Federal Reserve board.
In an op-ed piece first published on The New York Times website on Sunday and in its print edition on Monday, Diamond seemed frustrated by the confirmation process, detailing how President Barack Obama had nominated and re-nominated him to fill a vacancy on the seven-member board.
The Fed often operates with vacancies on its board. The board hasn’t had every seat filled since 2006.
Diamond’s initial nomination fizzled when the Senate adjourned in December without acting on it. When Obama resubmitted the nomination in January to the newly convened Senate, the Republicans held six additional seats, which was expected to make the confirmation process more difficult.
Senate Republicans blocked a floor vote on Diamond’s confirmation and have questioned his practical experience and research. Diamond is considered an authority on Social Security, pensions and taxation. He shared the Nobel Prize in economics that was awarded in October, with Diamond saying that his portion of the prize was for his work on unemployment and the labor market.
In the op-ed piece, Diamond took aim at Washington’s “partisan polarization” and said that there was “a failure to recognize that the analysis of unemployment is crucial to conducting monetary policy.”
“It is time for me to withdraw, as I plan to inform the White House,” Diamond wrote.
There was no immediate comment from the White House on Diamond’s plans.
Diamond said the leading opponent to his appointment was the ranking Republican on the Senate Banking Committee, Richard C. Shelby of Alabama. Diamond said Shelby questioned how his academic work on pensions and the labor market fit with conducting monetary policy.
“But understanding the labor market – and the process by which workers and jobs come together and separate – is critical to devising an effective monetary policy,” he wrote.
Diamond said he would continue as a professor at the Massachusetts Institute of Technology and would take advantage of opportunities presented to a Nobel laureate.
“I had hoped to bring some of my own expertise and experience to the Fed. Now I hope someone else can,” he said.
Of all the conspiracy theories swarming around the ridiculous question of where President Obama was born, my choice for most incomprehensible arrived this morning: The president, according to an avalanche of tweets, released a copy of his longform birth certificate specifically in order to distract attention from Federal Reserve Chairman Ben Bernanke’s first-ever press conference.
In inimitable fashion, Sarah Palin led the way, managing in the space of 140 characters to suggest both that Obama had been forced into the release and that it was some kind of insidious dodge.
Media: admit it, Trump forced the issue. Now, don’t let the WH distract you w/the birth crt from what Bernanke says today. Stay focused, eh?
But for the birth-certificate-as-distraction-theory to make any sense, doesn’t there have to be some kind of reason why Obama might not want people paying attention to Bernanke? And that’s where this loopiness completely breaks down. The Fed’s position is that the economy is continuing a “moderate recovery” — maybe growing a little slower right now than it expected a few months ago, but still significantly more healthy than six months or a year ago. The Fed believes that inflation is generally under control, and plans to end its stimulative program of securities purchases on schedule in June. According to Bernanke, the Fed expects unemployment to continue to fall and economic growth to accelerate in 2012.
There were no surprises at the press conference. Indeed, it would have been a complete shocker had there been any surprise, since the whole point of Bernanke’s efforts to increase transparency on Fed decision-making is to minimize the chance of market disruptions by making sure that everyone knows exactly what the Fed is planning to do and why. And while I’m sure Obama would like a faster rate of GDP growth and a sharper drop in the unemployment rate, it is hard to imagine that the White House has any problems with the steady-as-she-goes message from Bernanke, particularly insofar as it suggests that economic conditions during the heat of the presidential campaign will be the best of Obama’s entire term.
Which is not to say that that weren’t any problems with the press conference. Bernanke made a big deal of the tricky balancing act between the two halves of the Fed’s dual mandate — its responsibility to seek both “maximum employment and price stability.” But at the same time he acknowledged that while unemployment is too high, inflation isn’t a big enough threat to encourage the Fed to start tightening monetary policy right now. By his own reasoning then, shouldn’t the Fed be doing much more to bring down unemployment? Instead of ending its “quantified easing” securities-buying program — its main tool for juicing the economy and theoretically accelerating the expansion of the labor market — shouldn’t it be ramping it up? Paul Krugman wasted no time coming to his own conclusion about the press conference: Bernanke is “wimping out.”
Of course, judging by a sampling of live tweets during the press conference and the mix of questions from the reporters, the number of critics who believe the Fed is dropping the ball on unemployment is matched or exceeded by the number of critics who believe that quantitative easing is fueling higher commodity prices, weakening the dollar, and encouraging speculation. I’m pretty sure that Sarah Palin is in the latter camp — but if so, maybe she’s the politician who really wanted to distract attention from the press conference, because Bernanke refused to even mention the word “speculation” and repeatedly dismissed efforts to link the Fed’s stimulative, easy money policies to events in commodity markets.
But again, everyone knew he would do that. In no way, shape, or form did Bernanke deviate from the script that he has been delivering all year long. To do so would have broken his own rules. I really don’t know what Palin or anybody else was expecting. Ben Bernanke’s goal is to not make news. He succeeded, again, today.
FILE - In this Sept. 30, 2010 file photo, Federal Reserve Chairman Ben Bernanke testifies on Capitol Hill in Washington. The last time the Federal Reserve came up with a big plan to help the economy, it totaled $600 billion and touched off a 28 percent rally in the stock market. But if the Fed takes any new steps, as many people expect, it wont look anything like that. Look for small ball, not a home run. Operation Twist, as Fed-watchers are already calling it, in a nod to economic history, probably will help the economy and the stock market. (AP Photo/Manuel Balce Ceneta, File)(Credit: AP) 
Narayana Kocherlakota, Charles Plosser and Richard Fisher 
Peter Diamond 
President Barack Obama meets with 2010 Nobel Laureates in the Oval Office, Nov. 30, 2010. (Official White House Photo by Pete Souza)(Credit: Pete Souza) 
Federal Reserve Chairman Ben Bernanke speaks during a news conference at the Federal Reserve in Washington on Wednesday. 
