Fed Takes Yet Another Shot at the Economy

WASHINGTON, DC-Citing a worrisome rate of growth in the economy and job markets, the Federal Reserve has announced a new series of measures aimed at jumpstarting activity. These include first, a plan to purchase $400 billion in long-term Treasury securities, and second, a measure in which it will reinvest the proceeds of its investments in mortgage-backed securities instead of in Treasuries. It will fund the $400 billion long-term Treasury security plan with proceeds from sales of its short-term government debt--that is, securities that have maturities of less than three years.

“Recent indicators point to continuing weakness in overall labor market conditions and the unemployment rate remains elevated,” the bank said in a statement. It also pointed to a modest pace of household spending, concluding, flatly, that “growth remains slow.”

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These measures will be executed by June 2012, with the goal of placing downward pressure on long-term interest rates--a maneuver that the Fed first developed about 50 years ago, its so-called Operation Twist.

In a way Operation Twist’s resurrection is something of a surprise, given chairman Ben Bernanke’s rather optimistic assessment of the economy at last month’s speech at Jackson Hole--and his implication, at the time, that the Fed had exhausted its resources.

“I am fully aware of the challenges that we face in restoring economic and financial conditions,” he said that August morning. “With respect to longer-run prospects, however, my own view is more optimistic.” Legislative action and initiatives could go a long way to relieving some of the pressure on the economy, was another point that he made.

Certainly the Republican party prefers to take this route. Just before the Federal Reserve Bank’s meeting, top party leaders in Congress warned it not to take any more steps to assist the economy. Their thinking, according to the letter sent to the bank, is that previous attempts by the Fed to facilitate growth have been unsuccessful and further attempts could do more harm than good.

The counter argument to this claim is that while QE2--the Fed’s previous program of quantitative easing--did not have the impact many had hoped (unemployment is still high, GDP is noticeably slowing) it may have prevented an even worse slowdown. “No one will really know how much of a waste the $600 billion QE2 was, because maybe we avoided a complete disaster,” Guy Johnson, president of locally based Johnson Capital, told GlobeSt.com in an earlier interview.

Indeed, such reasoning explains the general expectation that the Fed would step up, once again, to the plate. Cassidy Turley economist Kevin Thorpe suggested as much in an interview with GlobeSt.com earlier this month when the Labor Department released its last round of disappointing job numbers.

There is also a greater likelihood that the Federal Reserve Bank, at its next committee meeting in September, will opt to try more aggressive monetary tactics to jumpstart the economy, based on this report, Thorpe said. “That could be QE3 or some other version of monetary support, such as purchasing longer-term securities.”