Ben Bernanke & Co. wrap up another two-day meeting of the Federal Reserve’s rate-setting committee on Wednesday, and neither the market nor economists expect much if any change to monetary policy.
It would be a real shocker if the Fed did anything more than extend its commitment to exceptionally low rates to the end of 2014. Because if nothing else, Bernanke tends to be very deliberate about telegraphing each and every Fed move.
Unlike his opaque, oracular predecessor Alan Greenspan, Bernanke is all about clear speaking and transparency. This is the Fed chief who instituted the practice of press conference following committee meetings. He believes in the power of communication in amplifying monetary policy and setting market expectations.
And whether it’s been through Bernanke’s own words in recent testimony before Congress or carefully placed “Fedthink” in the press, the chief has made it clear he’s willing to do more — but not until more data are in.
Bernanke plainly wants a better read on the economy before engaging in even more unconventional stimulus measures, especially since everything the Fed has done to date is very much subject to unintended consequences.
Additionally, as much as the central bank is supposed to be above politics, well, get real. There’s an election in November. Of course that influences the thinking of the members of the rate-setting Federal Open Market Committee (FOMC).
The Fed already extended its current program, known as Operation Twist, through to the end of the year — and that’s going to have to be enough, for the time being.
Twist, which involves selling short-term bonds and buying long-term bonds, is supposed to tamp down interest rates, thereby stimulating borrowing and spending. More important, it’s supposed to force cash out of the bond and money markets and into stocks, housing, business investment — heck, any place where it can do more good than sitting where it is now, which is essentially under the mattress.
But if ultra-low interest rates were the cure, the U.S. economy would be sprinting by now. The yield on the benchmark 10-year Treasury note has repeatedly hit record lows, falling below 1.4% in recent intraday action.
Mortgage rates are likewise notching all-time lows. The national average on a 30-year fixed hit 3.57% last week. True, the housing market has been a bright spot in an otherwise lackluster-to-disappointing stream if economic data. And pickups in mortgage and refinancing activity are boosting some banks’ bottom lines.
But the hard fact remains that gross domestic product grew at just a 1.5% annualized rate in the second quarter. That’s dangerously close to stall speed and not nearly fast enough to make a dent in the persistently high unemployment rate.
Ultimately, when it comes to the market, fear has folks steering clear of risk assets. Investors would rather take a minuscule or even negative return on capital than face losing it.
As for borrowing and lending, well, people are paying down debt, not taking more on. Meanwhile, qualified borrowers are hard to come by. Money is cheap, but it’s not going anywhere. It’s called a “liquidity trap,” and it’s a damn hard thing to unclog with monetary policy alone.
Bernanke has made it clear the Fed wants to wait until it has more information. He’s made it known that although the central bank is willing to do more — be it a third round of easing or some other new trick — he’s not ready to pull the trigger yet.
After all, the next Fed meeting is just six weeks away, at which point the central bank will have two fresh sets of unemployment reports to go on. Depending on how those break, the real pressure on Bernanke won’t start until September.