With the economy teetering on the edge of another recession, the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) is riven with dissension, agnosticism and uncertainty about its own potency.
Since a bursting housing bubble dragged the country into financial crisis four years ago, the FOMC confidently and aggressively has eased monetary policy. It pulled out the stops, creating innovative new liquidity facilities, scrapping its former resistance to funding investment banks, slashing interest rates to the bone and ballooning its balance sheet.
Going on three years, the Fed has held the federal funds rate near zero and has announced a quasi-commitment to keeping it there "through at least mid-2013." Not satisfied with just cutting short-term rates, it has gone "unconventional," buying $2.3 trillion of securities to push down long-term rates.
It would be hard to argue it’s all gone for naught, because we can’t know how bad things might have been otherwise. But one thing is certain: The Fed is increasingly realizing the limits of what monetary policy can accomplish.
Chairman Ben Bernanke acknowledged as much as he opened the Kansas City Fed’s Jackson Hole symposium in late August. After vowing the FOMC would reconsider a range of easing options at its September meeting and that it was "prepared to employ its tools as appropriate to promote a stronger economic recovery," Bernanke added an important qualifier: "Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank...."
One has to believe Bernanke’s tone was influenced by the three dissents registered against the FOMC’s Aug. 9 decision to extend the zero rate policy for another two years. One of those dissenters, Dallas Fed President Richard Fisher, repeatedly has said the Fed has done all it can do and now "it’s up to the fiscal and regulatory authorities."
Increasingly, Fed officials have pointed to the burden of government on the private sector.
"On the regulatory side, thousands of pages of new legislation have been recently enacted and many new implementing regulations are in the process of being drafted and adopted," says Richmond Fed President Jeffrey Lacker. "Anticipated shifts in regulatory policy appear to have produced a degree of apprehension that has dampened private sector willingness to hire and invest."
Atlanta Fed President Dennis Lockhart says that "in numerous conversations with business contacts across the Southeast," he has "heard a pretty consistent message — there’s just a lot of uncertainty," including uncertainty about environmental, financial and health care regulation.