March 2, 2021

Economix Blog: The Fed Splits



Notions on high and low finance.

There is more than meets the eye to the split at the Federal Reserve. There must be.

The Fed’s statement Tuesday afternoon says that the majority “currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

Three dissenters said that they “would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

Now there’s something to fight over. I say we need low rates “at least through mid-2013.” You say “an extended period.”

All this sounds like much ado about very little, but the Fed majority is all but promising that rates will stay low for nearly two years. We used to think “an extended period” could mean a few months.

In reality, the statement was an implicit invitation to traders to drive rates down further on the two-year Treasury note, and that happened immediately. Before the announcement the two-year rate was around 0.27 percent. Now it is 0.19 percent. That is a record low. Two weeks ago it was over 0.4 percent.

The initial stock market reaction was negative, presumably because there was some hope that the Fed would do more — like start another quantitative easing program, QE3. Instead there is a promise that the Fed “will maintain its existing policy of reinvesting principal payments from its securities holdings. The committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

In other words, they might do a QE3. Or they might not.

Perhaps the dissenters really want to essentially say something like “We’ve done all we can, and if the economy is still lousy, that is for someone else to deal with.” And the majority is unwilling to do that.

As it is, the Fed has signed on to the widespread perception that the economy is getting worse. But it is not doing a whole lot.

The fact that the Fed chairman, Ben S. Bernanke, now has three dissenters is a sign that the Fed, like one or two other Washington institutions you might be able to name, is less and less able to speak with one voice.

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