The Fed: Impotent But Not Giving Up

BCA Research, The Fed: Impotent But Not Giving Up

The Fed has largely exhausted its policy options and is divided about what to do next. Talk (aka communications) rather than monetary stimulus is now the preferred strategy.

The Fed’s extreme policy activism may have prevented economic disaster, but it has failed to deliver decent growth and sharply falling unemployment. This is because the level of long-term interest rates or the size of the Fed’s balance sheet do not deal with what ails the economy. Thus, additional quantitative easing would likely have little economic impact, even though the Fed has not ruled it out. Moreover, the case against more QE is supported by the fact that inflation expectations are holding up at a relatively high level and unemployment claims have stabilized. The key problems are that businesses lack the confidence to hire and spend aggressively and consumers are still trying to deleverage. There is not much that monetary policy can do to change this picture, but don’t expect the Fed to simply give up. The Fed is now considering how to send out the message that policy will stay highly accommodative until economic activity returns to more acceptable levels.

Bottom Line: Low rates clearly will be around for a very long time.

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