Out of Control Policy Blog

What’s the Plan, Mr. Bernanke?

The FOMC released its statement and rate decision this afternoon with, as expected, more of the same. Rates to be kept at zero until mid-2013 and no new action. No plan for exit was even hinted at, and the door still remains wide open for further easing.

The news surprised no one, but it certainly disappointed at least one member of the FOMC. Chicago Fed president Charles Evans dissented from the decision stating that he supported additional policy accommodation at this time. He has been calling for more money printing the entire year, and judging by a recent survey from Bloomberg, he’ll get what he wants. Sixty-nine percent of economists surveyed say the Fed will embark on a third round of quantitative easing by the first quarter of 2012. This time, however, the easing will most likely be in the form of purchases of mortgage-backed securities. The Fed has already purchased more than $1 trillion of such securities and continues to buy more with proceeds from their maturing portfolio, but apparently this isn’t enough.

So, what’s the plan?

On one side of the Fed there is Presidents Fisher, Plosser and Kocherlakota advocating no further easing and possible tightening. On the other, there is Evans and the rest of the FOMC board advocating buying whatever happens to be the flavor of the month. Not only is there nothing close to consensus, but there is also no clear goal of current Fed policy. It’s like the Fed is simply reacting to movements in the market. Every six months, their projections change and so does their policy.

 As early as this past June, the Fed predicted 2011 GDP growth of 2.7 to 2.9 percent growth (it was as high as 3.7 percent earlier this year) and PCE inflation of 2.3 to 2.5 percent. Now, they are predicting 2011 GDP growth of 1.6 to 1.7 percent growth, and PCE inflation of 2.7 to 2.9 percent. Earlier this year the Fed was discussing an exit to its easing and returning its balance sheet to a normal level. Now the Fed is considering ballooning their balance sheet even bigger – this after further easing was outlined at their last meeting when they launched Operation Twist.

The Fed is completely reactionary. They have no plan, but more importantly they have no accountability. How can they continue to print more money and buy more assets at every short-term move in the market, despite continuing policy failures?

The Fed has been consistently wrong both leading up to the financial crisis and at every juncture following its aftermath. According to Fed projections laid out in 2009, unemployment for 2011 is supposed to be at 4.9 to 7.3 percent (currently 9.1 percent) and PCE inflation is supposed to be at 0.8 to 1.8 percent (currently at 2.4 percent). We are nowhere even close to those projections, and yet we still trust the Fed’s crystal ball, rely on their purchases to magically revive the economy, and turn a blind eye to the massive subsidies banks are receiving on our behalf.

Ben Bernanke is running an ongoing experiment with the economy with no plan and no accountability for consistently being wrong. To boot, the FOMC is stretched out on polar ends of the easing/tightening spectrum and is in complete disarray. Is it any wonder why uncertainty is the underlying theme in today’s economy?

James Groth is Research Associate


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