The Federal Reserve is charged in one part of its dual mandate with doing what it cannot do--drive economic growth and thereby reduce unemployment. Since the Fed doesn't control fiscal policy, it isn't capable of creating an environment conducive to sustainable economic growth. Accordingly, it can't materially impact employment levels either.
Managing monetary policy and inflation is another story. What the Fed can and does do quite well is manage the nation's money supply. Through monetary policy, it thereby contains inflation via the price of money, or the level of interest rates.
The management of fiscal policy is within the purview of the Congress and White House. They are the ones that impact fiscal policy, taxes and government spending. Not the Fed.
Accordingly, while the Fed can effectively discharge its responsibility with respect to monetary policy and inflation by controlling the money supply, it can't influence economic growth and hence employment in any meaningful long term manner.
Simply put, Congress and White House have the duty to manage our country's fiscal affairs and create the conditions for sustainable economic growth, leading to high and stable employment levels.
You cannot push on a string discusses the history of the Fed's difficult if not impossible dual mandate--to keep inflation low and stable while achieving high levels of employment.
Pointedly it says this:
"One of the Federal Reserve’s dual mandates should be dropped.
Last week, at his press conference following the release of the minutes of the latest meeting of the Federal Open Market Committee, Fed chair Ben Bernanke spent a lot of time apologizing for failing to get the unemployment rate down.
He need not have done so. Pushing the unemployment rate down not only conflicts with the central bank’s main objective of keeping inflation low, it is also something that the money mavens can do little to influence.
It’s like trying to push on a string."
Later the article concludes, "The blame for not boosting growth enough to cut joblessness rests with the Congress and the White House. They should recognize that this is their responsibility, not the Fed’s."
To reiterate, the Fed isn't empowered to cut or raise taxes. Neither can it reduce or increase government spending.
The only genuinely effective tool of influence the Fed has is to increase or decrease the money supply and thereby lower or raise interest rates, especially those of a short duration.
Today our nation's financial problems aren't of a temporary nature. Not even close. So the Fed will begin to play the role of an interested and innocent bystander from this point forward. It's pretty much done what it can do to help the cause.
We are in the midst of a long term transformation of our U.S. economy. This is in no way a normal recession where monetary policy and interest rate levels can have much effect. Rates are at zero already and can't go lower.
Meanwhile, household and national debt levels have risen to historically high levels, and the economy is stalled and at the point of no serious growth for the foreseeable future. Unemployment is high and, without economic growth, will remain high even as interest rates will stay quite low.
Housing is perhaps the biggest driver of this new and "non-normal" environment. Gloom Grips Consumers, and It May Be Home Prices puts it this way:
"The United States has a confidence problem: a nation long defined by irrational exuberance has turned gloomy about tomorrow. Consumers are holding back, businesses are suffering and the economy is barely growing.
There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk.
That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.
Many say they believe that the bust has permanently changed their financial trajectory.
“People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data . . . shows that expectations for economic growth have fallen to the lowest level since May 1980."
Thus, the Fed can't change the gloomy mood of consumers and how they feel about their financial future or the outlook for home prices. All it can and should do is conduct monetary policy in such a way so that both deflation and inflation are avoided at all costs. With interest rates likely to stay at zero for a long time, there is nowhere for them to go but up. The Fed is about out of bullets.
With respect to economic growth and job creation, that's best left to the private sector, assuming, of course, that the Congress and White House decide to encourage the private sector's growth. In any event, that's not a job for the Fed.
But if the Fed somehow is able to remove itself from the "get the economy growing again and create jobs" discussion, maybe the Congress and president would gut up and not interfere unduly with the private economy's workings. It's the only way out.
Thanks. Bob.
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