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Wednesday, July 21, 2010

Why are the Fed's Options Still under Review?

I'm in a bit of a rush, but I want to note this from Ben Bernanke:

Bernanke’s comments to Congress are largely as expected, but some may be a bit taken aback by his comments on shrinking the balance sheet, which doesn’t suggest much central bank appetite to provide additional stimulus to a troubled economy. ...
In the testimony, Sen. Shelby asks Bernanke what everyone wants to know: what more can the Fed do for the economy, if needed. Bernanke replies that the Fed has options from lowering the interest on reserves rate, to language changes in the FOMC outlook, to balance sheet tweaks.
He notes current policy is “already quite stimulative” and adds “we do still have options, but they are not going to be conventional options.”
Bernanke says any additional action is still under review, saying “we have not come to the point where we can tell you precisely what the leading options are.”

After all this time, and after all the calls for the Fed to do more, they don't even know what the leading options are? Bernanke says they are prepared to do more if conditions warrant it, but if there was a sudden disruption in financial markets tomorrow, they wouldn't even know which policy option to prefer. I expected better than this from Bernanke and the rest of the Fed.

The we could do more but aren't ready to do so just yet line from Bernanke is also puzzling. With unemployment as high as it is and with the projections for a very slow recovery -- if we can avoid a double dip -- why doesn't the Fed do more now? Why hasn't it done more already? That question has never been answered to my satisfaction.   [dual posted]

    Posted by on Wednesday, July 21, 2010 at 01:44 PM in Economics, Monetary Policy | Permalink  Comments (24)


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