On Tuesday, the Federal Reserve responded to weeks of poor economic news — and an increasingly volatile stock market (which crashed more than 600 points Monday, jumped more than 400 points Tuesday, and then cratered more than 400 points Wednesday morning) — by pledging to keep interest rates near zero through the middle of 2013. That interest rate, which affects the costs of banks lending money to each other, essentially extends current fiscal policy for at least two years. Some, however, argue that borrowing costs aren't the major impediment to an economic rebound in the first place. Is this plan "foolish" or wise?
Bernanke's announcement is inconsequential: This doesn't do "much to alter economic or financial conditions," says Unicredit economist Harm Bandholz, as quoted by The Wall Street Journal. Investors already assumed interest rates wouldn't rise until late 2012 or early 2013, so this isn't exactly a major gamechanger. If anything, this long-term promise just limits the Fed's flexibility and options when responding to fiscal twists and turns in the future.
"Economists react: Fed 'bunts' with timeframe for low rates"
This might help... but not enough: While the market had a strong finish Tuesday, "it's doubtful that the Fed's move will be enough to increase employment and growth," says The New York Times in an editorial. On top of that, three members of the Fed's own policy committee opposed keeping rates low into 2013, and that's "particularly disturbing." Such opposition could hamper further efforts by the Fed to aid the flailing economy. The committee needs to take aggressive action to stimulate the economy, not "focus on combating inflation at a time when the economy is clearly not overheating."
"Half-measures from the Fed"
Bernanke's interest rate promise is just the start: "An unprecedented number of dissenters vot[ed] against Bernanke's move," suggesting that "the mid-2013 language is just the start of what the chairman has up his sleeve and the inflation hawks want no part of it," says George Maniere at Benzinga. Expect Bernanke to make more major announcements later this month, and give "more details on what forms of stealth QE" — quantitative easing, a stimulative measure in which the Fed increases the supply of money in our economy — "he has in mind to support growth."
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