Fed meeting brings no miracle cure from Dr. Bernanke

August 01, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The acronym FOMC stands for Federal Open Market Committee -- not, as one might think, Fleeting Optimism Marks Conclusion. But the latter is more descriptive of what's occurred after recent Fed meetings.

Here's the usual pattern: The stock market starts to creep up in the days before a Fed meeting, as broad speculation that the Fed will take stimulative measures takes hold. Then, once the Fed announces its new policies, disappointment sets in. This happened yet again with the July 31-August 1 FOMC meeting. It turned out, yet again, that the Fed has no miracle answers to the economy's persistent malaise. The only question is why anyone thought they'd pull a rabbit out of the hat in the first place.

What the Fed said

The Fed pulled no punches in acknowledging that the economy has slowed. It noted that employment growth and household spending has weakened, and that the housing sector remains depressed. Among growth factors, the lone bright spot the Fed cited was business fixed investment, but to put this in perspective, consumers are a far bigger portion of the economy than business spending.

Given this clear vision of the economy's shortcomings, it may have seemed surprising to some that the Fed's announced policy response wasn't more robust. It essentially pledged to keep existing policies in place: keeping short-term interest rates low and buying bonds to hold down long-term interest rates.

The simple reason why the Fed's response was so tepid is that there aren't many more options at the Fed's disposal. Those who think the Fed should do more are usually short on specifics for what exactly they think the Fed can do.

What it means

Economic language can be pretty dense, especially in the hands of the Fed, so here is a succinct translation of what the Fed was really saying in its latest announcement:

  • The economy has gone from bad to worse.
  • In particular, the unemployment rate is worrisome.
  • Businesses are spending, but households are not.
  • At least inflation has calmed down -- otherwise things could get extremely nasty.
  • We will do everything in our power to keep interest rates low for the foreseeable future. We know they are already about as low as they can go and this hasn't helped yet, but we really can't think of anything else to try.
  • We will continue to monitor the situation, because that's what we're paid to do.
  • Not only will we monitor the situation, but we'll talk about promising to "provide additional accommodation" in order to foster the vague hope that there is more we can do, because hope is very important at times like this.

If you are disappointed that the Fed didn't have something more dramatic to announce, you shouldn't be. The Fed's role is geared toward making fine adjustments to moderate the economy. Unfortunately, what this economy needs is not so much a fine tuning as a set of jumper cables.

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