Easier money hasn't led to more growth, so we need still easier money.
By WSJ Editorial Board
Four years ago this month the Federal Reserve began its epic program
of monetary easing to rescue an economy in recession. On Wednesday,
Chairman Ben Bernanke
declared that this has worked so well that the Fed must keep easing
money for as long as anyone can predict in order to save a
still-sputtering recovery.
That's the contradiction at the heart of the Fed's latest foray into
"unconventional policy," which is a euphemism for finding new ways to
print money: The economy needs more monetary stimulus because it is
still too weak despite four years of previous and historic amounts of
monetary stimulus. In the words of the immortal "Saturday Night Live"
skit: We need "more cowbell."
In his press conference Wednesday, Mr. Bernanke was at pains to say
this week's decisions were nothing new, merely an implementation of the
policy direction that the Fed's Open Market Committee had set in
September. This is technically true, but the timing and extent of the
implementation are more than details.
The Fed committed Wednesday to purchase an additional $45 billion in
long-term Treasury securities each month well into 2013, in addition to
the $40 billion in mortgage assets it is already buying each month. At
$85 billion a month, the Fed's balance sheet will thus keep growing from
its current $2.9 trillion, heading toward $4 trillion by the end of the
year. Four years ago it was less than $1 trillion.
The Fed's goal is to push down
long-term interest rates even lower than they are, to the extent that's
possible when the 10-year Treasury note is trading at 1.7%. The theory
goes that this will in turn reduce already very low mortgage rates,
which will help spur a housing recovery, which will lead the economy out
of its despond. This has also been the theory for the last four years.
In case there was any doubt about its resolve, the Fed statement also
issued a new implicit annual inflation target: 2.5%. The official
target is still 2%. But the Open Market Committee stated that it will
keep interest rates near zero, and by implication keep buying bonds, as
long as the jobless rate stays above 6.5% and inflation stays "no more
than a half-percentage point above the Committee's 2-percent longer-run
goal."
That is a 2.5% inflation target by any other name, and it's striking
to see a central bank in the post-Paul Volcker era say overtly that it
wants more inflation. This is a victory for the Fed's dovish William
Dudley-Janet Yellen faction that echoes economists who think we have to
inflate our way out of the debt crisis. Inflation remains quiescent, but
central banks that ask for more inflation invariably get it.
These new overt economic targets are part of Mr. Bernanke's campaign
for more "transparency" in monetary policy, but they also have the
effect of exposing how much the Fed has misjudged the economy. In
January 2012, the Board of Governors and regional bank presidents
predicted growth this year in the range of 2.2%-2.7%. On Wednesday, they
predicted growth of 1.7%-1.8%, which means they are expecting a
downbeat fourth quarter.
Which brings up another irony: Mr.
Bernanke may be pulling the trigger on more bond purchases now because
he fears economic damage from consumer and business concern over the
fiscal cliff. Yet no one has done more to promote public and market
worry over the fiscal cliff than Mr. Bernanke, notably in his June
testimony to Congress.
Meantime, the Fed's near-zero interest rate policy will continue to
disguise the real cost of government borrowing. One reason the Obama
Administration can keep running trillion-dollar deficits is because it
can borrow the money at bargain rates. Stanford economist and Journal
contributor John Taylor says the Fed has bought more than 70% of new
Treasury debt issuance this year.
All of this will create a fiscal cliff
of its own when interest rates start to rise. The Congressional Budget
Office says that every 100 basis-point increase in interest rates adds
about $100 billion a year to government borrowing costs. Pity the
President and Congress who have to refinance $15 trillion in debt at 6%.
If Mr. Bernanke really wants to drive the President and Congress to
reduce future spending, he shouldn't keep bailing them out with easier
money.
The overarching illusion is that ever-easier monetary policy can
return the U.S. economy to a durable expansion and broad-based
prosperity. The bill for unbridled government spending stimulus is
already coming due. Sooner or later the bill for open-ended monetary
stimulus will arrive too.
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