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Published: Friday, 4/29/2011


The limits of Fed policy

For too long, policy decisions by the Federal Reserve were cloaked in secrecy. Alan Greenspan, the longtime chairman, was notoriously Delphic.

So it was good to see the current chairman, Ben Bernanke, meeting the press this week, in the first of what are to be quarterly question-and-answer sessions.

It shows that the Fed has learned, albeit the hard way, that it must build understanding and support for its policies.

For all the talk, there is little Mr. Bernanke can say or do to alter today's grim economic realities. The tools the Fed has to raise or lower interest rates are not by themselves going to fix what most ails the economy today: continued high unemployment, falling home prices, weak income growth, and the erosion of the manufacturing sector.

Only fiscal policy can directly address these crushing problems. That requires Congress and the White House to agree on ways to raise and invest taxpayer dollars for specific programs, projects, and recovery efforts.

That is not to imply, as Fed critics contend, that current Fed policy has failed. Its most controversial action -- a $600 billion bond-buying program intended to keep long-term interest rates low -- has prevented a deflationary spiral and correlated with more-robust job growth.

The Fed's decision this week to continue the bond-buying program as scheduled through June, together with its decision to keep interest rates near zero for the foreseeable future, represent sensible support for a still-fragile economy.

So long as fiscal policy is off the table, the economy is likely to limp along for years. The White House has some good ideas, including proposals to boost educational achievement and, importantly, to raise taxes for needed spending.

A bipartisan group of senators proposes creating an infrastructure bank to lend seed money -- and attract private capital -- for major public works projects. But most congressional Republicans are fixated solely on cutting federal spending as quickly as possible, and have dominated debate and policy-making.

In his press conference, Mr. Bernanke emphasized the need to control the long-term budget deficit. Just as clearly, he emphasized that the best approach would be to enact a credible plan soon, to be implemented over time. If only Congress would take heed.

It is important that the Fed not prematurely raise interest rates or otherwise tighten its policy. The Fed's ability to boost economic activity is limited. Unfortunately, for now monetary policy is the only game in town.

-- New York Times

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