While "I'll Have Another" failed to win the Triple Crown, that
didn't stop the Federal Reserve from "having another" this week --
as in another round of Operation Twist.
The Fed's Open Market Committee meeting opened to great
expectations, but
closed to little more than a shrug
. The stock market essentially waffled up and down after the Fed's
announcement, as the reality sank it that there is just too much
about this economy that the Fed can't change.
More of the same
The Fed's announced that it will continue "Operation Twist,"
which is a program to bring long-term interest rates down by
exchanging short-term Treasuries for long-term ones. This program
was due to expire this month, but now the Fed has pledged to buy
$267 million in long-term Treasuries over the remainder of the
year.
In essence, the Fed continues to operate on the premise that
lower interest rates will stimulate the economy -- even though
three years of extremely low interest rates have failed to do so.
This may not be blind faith on the part of the Fed so much as an
acknowledgement that there is really little it can do to pull this
economy out of the doldrums.
Changing its forecasts
The Fed also changed its forecasts for economic growth and
unemployment, in each case reflecting a more pessimistic outlook
for the remainder of this year and beyond. The Fed also lowered its
inflation projection.
If it seems that the Fed is avoiding accountability for its
forecasts by changing those forecasts as the results become known,
remember that you can always compare Fed's original forecasts from
the start of the year with the actual economic results by looking
at the
Fed Reality Check
feature on MoneyRates.com.
What the Fed can't change
Though the Fed can change its forecasts, the limitation on its
policy responses is that there is just too much about the economy
that the Fed can't change. Here are three prominent examples:
-
Consumers aren't clamoring to borrow.
With a slow economy and under a mountain of debt already,
consumers aren't really in a position to beat a path to the
nearest loan officer. Under these conditions, lowering interest
rates has little stimulative effect. It may actually have some
negative impacts, such as draining interest income from the
economy, and reducing the incentive for lenders to make
loans.
-
Global demand is slipping.
With the crisis in Europe and slowdowns in large developing
countries affecting U.S. trade, the problem is much bigger than
the Fed's jurisdiction.
-
Uncertainty is reining in businesses.
On top of the aforementioned economic problems, congressional
gridlock and a closely-contested presidential race are prompting
businesses to wait and see rather than make bold moves to
expand.
In a way, the Fed changing its forecasts in light of the latest
economic figures is a useful reminder of one cold reality: The Fed
is forced to follow the economy more than lead it.