Twist and Sell

Editorial do WSJ

The Federal Reserve-as-economic-savior school took a beating yesterday, after the Fed's Open Market Committee announced its latest policy gambit to avoid a recession. Stocks promptly sold off on the Fed's comments that it now sees "significant downside risks" to the economy, and perhaps also as reality dawned that the reprise of 1961's Operation Twist is more gesture than salvation.

The Fed announced that through June 2012 it will buy $400 billion in Treasury bonds at the long end of the market—with six- to 30-year maturities—and sell an equal amount of securities of three years' duration or less. The point, said the FOMC statement, is to put further "downward pressure on longer-term interest rates and help make broader financial conditions more accommodative."

It's hard to see how this will make much difference to economic growth. Long rates are already at historic lows, and even a move of 10 or 20 basis points isn't likely to affect many investment decisions at the margin. The Fed isn't acting in a vacuum, and any move in bond prices could well be swamped by other economic news. Europe's woes are accelerating, and every CEO in America these days is worried more about what the National Labor Relations Board is doing to Boeing than he is about the 30-year bond rate.

The Fed will also reinvest the principal payments it receives on its asset holdings into mortgage-backed securities, rather than in U.S. Treasurys. The goal here is to further reduce mortgage costs and thus help the housing market. But home borrowing costs are also at historic lows, and the housing market suffers far more from the foreclosure overhang and uncertainty encouraged by government policy than it does from the price of money.

The Fed's announcement thus had the feel of an attempt to show it is doing something to help the economy, even if it can't do much. The current 10-member FOMC also reported three dissenting votes from regional bank presidents, who also dissented from its August decision to declare that short-term interest rates will stay near-zero through mid-2013.

The dissenters think that the Fed has done about all it can, and it's hard to disagree. Some on Wall Street and Washington are agitating for round three of quantitative easing, but unemployment barely fell and growth actually slowed during the second round. To the extent that QEII caused the spike in food and energy prices, the Fed contributed to the slowdown and damaged middle-class real incomes. Round three might do the same.

Yesterday we defended the dissenters against political pressure from the likes of Congressman Barney Frank. But we should point out that, at the time we wrote, we hadn't heard about the letter that four Republican Congressional leaders sent to Fed Chairman Ben Bernanke earlier this week urging him to "resist further extraordinary intervention" in the economy.

We agree with that policy point, but we also think the letter was unwise. The current Fed has been too political in our view, and Republicans should be speaking up for the cause of Fed independence rather than playing tug-of-war with Mr. Frank over Mr. Bernanke.

The larger point is that the economy's problems aren't rooted in the supply and price of money. They result from the damage done to business confidence and investment by fiscal and regulatory policy, and that's where the solutions must come. Investors on Wall Street and politicians in Washington want to believe that the Fed can make up for years of policy mistakes. The sooner they realize it can't, the sooner they'll have no choice but to correct the mistakes.