Friday, January 27, 2012
The Zero Decade
Editorial do WSJ
The two most powerful men in Washington have a big disagreement. No, not President Obama and Speaker John Boehner. We mean Mr. Obama and Federal Reserve Chairman Ben Bernanke, who can't seem to agree on the health of the U.S. economy.
On Tuesday night, the President proclaimed that the "state of our Union is getting stronger," employers are hiring faster than they can find skilled workers, and manufacturing is booming. Less than a day later, Mr. Bernanke and his Open Market Committee (FOMC) downgraded their already modest growth outlook and said the recovery is so vulnerable that the Fed must keep interest rates at near-zero for another three years.
The contradiction may not be as profound as it seems. Mr. Obama is running for re-election and this time he needs to sell audacity more than hope, while the Fed is still trying to reflate the housing market that it seems to believe is the main driver of economic growth. The Fed is straining to deliver the asset-price "stimulus" that Mr. Obama can't any longer get out of Congress.
That's the best way to understand the FOMC's remarkable announcements on Wednesday, followed by Mr. Bernanke's quarterly press conference. The central bank had already promised to keep short-term rates near-zero through most of 2013, but now it feels the need to assure investors it will keep them there through the end of 2014. That would be six years in total, more than half of what may eventually become known as the Fed's Zero Decade.
Mull that one over: The Fed is declaring that it needs to run the same super-easy monetary policy when the economy is growing by 2% or 3% as it did amid the worst of the financial panic. And keep doing it past the horizon. The unavoidable implication is that the Fed doesn't think the economy will grow any faster until what would be halfway through Mr. Obama's second term. The other implication is that the Fed has no idea what to do other than to push even harder on the monetary accelerator. Maybe this time, it hopes, the economy's clutch will engage.
This not-so-quiet desperation was clear in a second Fed release that hasn't received as much attention as it deserves. In a statement redefining how it interprets its policy mandate from Congress, the FOMC said it has "reached broad agreement" on new operating principles.
The Fed's dual mandates are stable prices and full employment, and the Fed said sometimes the two are complementary. But from now on when they're in conflict, the Fed essentially said, it will put inflation aside and instead focus principally on cutting joblessness.
It's no coincidence that such a restatement of principles is coming now, when the Fed is looking to justify its extraordinary monetary interventions. If there were any doubt about this intention, Mr. Bernanke put it to rest in his press conference when he said more "quantitative easing" is likely if growth doesn't accelerate soon.
One problem with all of this was pointed out yesterday by Kevin Warsh, who as a Fed governor sat on the FOMC until early last year. Speaking at Stanford, Mr. Warsh said that "exceptionally accommodative monetary policy" has its uses in a crisis or recession. But the Fed's "recent policy activism—measures that go beyond a central bank's capacity or traditional remit—threatens to forestall recovery and harms long-term growth."
That's a useful warning for markets to hear. Consider that Mr. Bernanke's transparent goal is to drive down long-term interest rates to reduce mortgage rates to reflate the housing bubble. But intervening so directly to keep rates artificially low has made the bond market useless as a price signal or indicator of risk across the larger economy.
The Fed is thus pushing investors of all kinds further out on the risk curve, with consequences no one can foresee—least of all the Fed, as we are now learning from the just-released FOMC transcripts from 2006.
Recall that during the last decade the Fed assured everyone there was nothing to worry about as it kept rates too low for too long, only to create a housing bubble it never did recognize. Recall, too, how its second round of bond-buying (QE2) in 2010-2011 was supposed to lift stock prices but in addition sent commodity prices soaring. Consumer confidence plunged as Americans felt the strain of higher prices for food and energy, and the economy has done notably better since QE2 ended.
Where will the risk-taking excesses show up this time? Who knows, and perhaps the Fed will retreat before the worst happens. But it was fascinating to see last week that investors were willing to buy $15 billion in 10-year Treasury inflation-protected securities, or Tips, despite a negative real yield. That's right, investors were willing to accept negative current returns in exchange for security against a future inflation breakout.
We mean no counsel of doom because the good news is that the U.S. private economy is performing remarkably well considering all of the burdens government has put on it. Imagine what it could do if our politicians promised not to stick it with new taxes, and the Federal Reserve returned to a normal policy that focused on long-term growth rather than reflating bubbles.