Ask the expert: Has the Fed locked us in?
September 09, 2011
Q: Is the recently announced two-year commitment to low interest rates locked in by the Federal Reserve, or can they raise rates before the expiration date? Also, does Ben Bernanke really know what he's doing?
A: The Fed isn't locked into that commitment of keeping rates low for two years--a more accurate description might be "painted into a corner."
Actually, your first question hits on the absurdity of the Fed's announcement. It is ridiculous to announce monetary policy two years in advance, but the announcement is meaningless anyway because the Fed reserves the right to change policy whenever conditions dictate.
So why did the Fed do it? Because the Fed is running out of new tools for stimulating the economy. At the time of the announcement, the financial markets were reeling from the debt ceiling debacle, and the Fed apparently felt it needed something more dramatic than announcing it was keeping rates low yet again. So, Bernanke threw in the two-year commitment wrinkle.
Bernanke should be respected as a hard-working, sincere, and knowledgeable guy. The problem is that the Federal Reserve's power to manipulate the economy is much more limited than the financial press--and often the financial markets--seem to think it is. There are no miracle monetary cures to the current economic problems.
Bernanke is often described as a keen student of history, and this may actually be a drawback in the current situation. He has stubbornly adhered to the classic notion that low interest rates are stimulative, even though that has turned out to be a case of pushing on a string in an environment with low inherent borrowing demand. Perhaps less of a historian would have more of an outside-the-box insight, such as that keeping rates on CDs, savings accounts, and money market accounts down has actually taken some income out of the economy.
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