Boink? Clink? Thunk? There is no standard editorial cartoon caption for a can being kicked down the road. But whatever that sound might be, you could hear it Wednesday when the Federal Reserve’s Open Market Committee decided to stick with its ongoing policies.
Part of this is expanding the monetary base, which includes the total amount of “reserves” held in the banking system, through the buying up of some $85 billion in bonds each month. The Fed also is trying to twist the relationship a bit between short-term and long-term interest rates by its choices of which bonds to buy and how to roll over funds from those that have matured.
This outcome was no surprise to anyone, and financial markets took the committee’s statement in stride. Stocks fell slightly, perhaps in response to hints that Fed policymakers see the economy as being a little softer than expected.
The lack of drama may be welcome to a world somewhat shell-shocked by the actions of officials in charge of fiscal policy (government taxing and spending) but the quandary that the Fed — hence the nation and world — faces is not getting any easier.
Monetary policy is mimicking one of those works by Gabriel Garcia Marquez or Eugene Ionesco in which everyone knows what the outcome will be, but a lot of tedious waiting is ahead before a resolution is reached.
Eventually, the Fed is going to have to slow its creation of new bank reserves. That will cause higher interest rates, especially short-term ones. That is clear to everyone, but we don’t know exactly when that will happen.
However, just as theatergoers repeatedly check their watches knowing that Ionesco’s king has to exit pretty darned soon, the more certain we Fed watchers are that the end is near.
The current committee meets twice more, on Dec. 17-18 and Jan. 28-29, before its membership changes and Ben Bernanke steps down, hopefully to be replaced by a confirmed Janet Yellen, and four of the five Fed district bank presidents rotate off and another four on.
Thus, by mid-March when the new committee meets, its membership will be significantly different. No one knows whether that will be true for the economy — particularly given ongoing uncertainty about short- and long-term budgetary gyrations.
By law, the Fed is supposed to manage the money supply so as to achieve as high a level of employment as possible while avoiding inflation. The law says nothing about how it should respond to gridlock on the fiscal side of things.
Traditionally, Fed officials were scrupulous about keeping their noses out of the business of Congress and the president, although Alan Greenspan violated that when he gave a cautious and conditional endorsement of George W. Bush’s proposed tax cut.
Now, however, the effects of a log-jammed fiscal policy on the economy are deleterious enough that many at the Fed have thrown professional courtesy to the wind.
In the past months, Open Market Committee members have stated that as long as fiscal policy is in disarray, the Fed needs to hold to its policy of money growth. During the partial government shutdown, Dallas Fed President Richard Fisher was particularly blunt in his criticism of Capitol Hill.
The committee’s statement indicates that inflation remains, if anything, a bit under the desired annual rate of 2 percent or so. That is as measured by the Consumer Price Index and by the “Personal Consumption Expenditures” deflator for that component of gross domestic product. The deflator measures about what the Consumer Price Index does, but uses newer statistical techniques and is more reliable.
This is all true, but it ignores any mention of the effects of easy money on asset prices. Yet the Dow and S&P have been setting records again recently. Farmland prices are sticking up at extremely high prices relative to the income generating capacity of land, and many experienced observers see substantial air back in U.S. residential real estate prices.
One of those observers is the newly minted Nobelist Robert Shiller, who correctly called a housing bubble the first time around. The issue gets public mention from a few of the district bank presidents on the committee, but apparently it is not a significant issue in its deliberations.
It may be reassuring to citizens and financial markets for Fed officials to project a sense of calm. But it seems clear that the Open Market Committee doesn’t have a clearer picture than anyone else of the way forward.
Yes, the extraordinarily loose monetary policy followed for the past five years eventually will be tapered down. And, yes, economic activity will continue although no one knows at what pace.
But at more than any point in its history since the panicked days of 2008-2010, the Fed has had to just make things up as it goes along.
It can talk now about numerical criteria based on inflation and unemployment suggested by this district bank president or that, but in practice monetary policy will be seat-of-the-pants over the foreseeable future.
It might even be exciting to watch — at least if one isn’t inclined to be queasy.