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  • Making Sense of the Latest Fed Announcement

    The Federal Open Market Committee expressed qualified confidence in the recovery. And the Federal Reserve will be keeping interest rates low, and will bring about an end of its second round of quantitative easing. From the FOMC release: Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability. To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability. Read the full press release here . Following the FOMC meeting, Fed chair Ben Bernanke spoke in a highly anticipated press conference. And he defended the Fed's decision to end QE2, saying that the policy was "never meant to be a cure-all." Here is a video excerpt from the Wall Street Journal : And for some interpretation of Bernanke's presser, we turn to MoneyWatch , where Mark Thoma discussed the Fed's latest announcements with MoneyWatch.com editors Eric Schurenberg, Jill Schlesinger and Jack Otter :

  • Long-Run Debt and The Intersection of Fiscal and Monetary Policy

    Mark Thoma thinks Alan Greenspan and Ben Bernanke were wrong to give their opinions about fiscal policy during Congressional testimony. But he does think that the Fed chair should address the effect of fiscal policy on monetary policy: That is, while I don’t think the Fed chair should give advice on the specifics of fiscal policy, the chair should make clear how fiscal policy choices will affect or constrain monetary policy. Let me try to explain how monetary and fiscal policy are connected through the budget deficit. There are two different government budget issues to think about. The first concerns the long-run trajectory for the debt, and the projections are that the debt will expand to unsustainable levels if we don’t do something to stop it. That means, above all else, reducing the growth in health care costs. The second issue concerns the short-run debt created in an attempt to stimulate the economy. This is a small amount compared to the long-run debt problem, but it is still a lot of money and we will need to pay this back when things are back to normal (but not before then, since paying it back too soon could undermine a recovery). And Thoma goes on, in his Money Watch column, to look at "the long-run debt problems" as a way of exploring the potential challenges of the Fed moving forward. Read The Relationship Between Budget Deficits, Fed Independence, and Inflation .

  • Bernanke and the Fed's Independence

    Ben Bernanke delivered his Semiannual Monetary Policy Report to the Congress yesterday before the House Financial Services Committee , and he expressed a relatively upbeat view of the economy . He also defended the need for the Federal Reserve to hold onto independence in the face of proposals to give the General Accounting Office more auditing powers, saying "a perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability." Here is his opening statement, from Bloomberg : Bernanke will continue his testimony later today. Mark Thoma 's concern with the Fed these days has less to do with its independence as a whole, and more, it seems, with the independence of the district banks as currently structured: As it stands, the Board of Governors in Washington has considerable influence over who is appointed to key positions such as the President of the district banks, and those Presidents represent five of the twelve votes at the meetings where monetary policy is set. More independence of the district bank Presidents and other district bank personnel from the Board of Governors would be a healthy change (there is also a question of whether geographic representation through district banks is the best way to capture the public interest, but I'll leave that aside for now). Read Fed Independence here .

  • Bernanke on Growth in 2009, and The Fed's Reaction to the Crisis

    Federal Reserve Chair Ben Bernanke testified on the federal budget before the House Budget Committee today. He told the committee that he expects the US economy to grow later this year, and that, while recovery will be slow, he believes the federal government's overall response--and the Fed's approach specifically--has been effective in keeping the financial crisis for doing more damage. Here are three ways to catch his statement. 1) You can read his full statement, provided by the Fed here ; 2) You can watch an excerpt, thanks to the Wall Street Journal ; 3) You can watch some of the question and answer with Wyoming Rep. Cynthia Lummis (R), thanks to Cynthia Lummis; 4) Or you can read a fake interview from Mark Thoma , in which Thoma injects his own questions into Bernanke's prepared statement, and in the process provides some helpful context for the remarks. It's available here .