Nearly five years after entering a kind of monetary wilderness, there remains no obvious way out for the Federal Reserve. Indeed, at times, the Fed seems to be stumbling deeper into the jungle, getting itself more deeply entangled in unconventional policy experiments.
The Fed has held the Federal Funds rate near zero for 3 1/2 years, signaled it expects to keep it there at least through late 2014 and bought more than $2 trillion of bonds in two rounds of quantitative easing (QE) to push long-term rates to record lows.
Yet the economy is growing too slowly to generate the kind of job growth needed to persistently reduce unemployment.
Most recently, the Fed's policymaking Federal Open Market Committee felt the need to prolong its "maturity extension program," better known as Operation Twist, in the face of slowing growth, weakening labor markets and what it calls "significant downside risks" from Europe. It will buy another $287 billion in bonds by the end of the year, financed by sales of shorter-term securities.
It's hard to miss a note of frustration, perplexity and dissension among Fed policymakers as they survey the economic and financial landscape in this age of transparent Fed communication.
Some, such as Chicago Federal Reserve Bank President Charles Evans, suspect the U.S. is precariously close to being in a Japan-style "liquidity trap," a black hole of monetary policy from which escape is difficult, if not impossible. Indeed it was to avoid that dreaded trap, in which interest rates can't fall low enough to revive economic growth sufficient to reduce unemployment, that the Fed has aggressively used unconventional credit easing tools.
Evans' answer is to buy mortgage backed securities and other assets even more aggressively and to pledge to keep the funds rate "exceptionally low" even longer.
Others, notably Dallas Fed President Richard Fisher, question whether the Fed can do anything else constructive. The Fed already has slashed rates near zero and more than tripled the size of its balance sheet, they argue. Now, it's up to fiscal and regulatory authorities to do their part to boost growth.
End the uncertainty about taxes and regulations and lighten the governmental load on the private sector and it will respond, some argue.