In a just-published potpourri of options said to be under review by the Federal Reserve if it decides its long-standing and remarkable policy of zero short-term interest rates isn’t enough to spur a recalcitrant U.S. economy, one idea jumps out as a particularly bad one.
The notion in question, as published in a Washington Post article today by Neil Irwin, is that the U.S. central bank could publicly commit to an even longer period of keeping short-term interest rates at the emergency level of zero to 0.25%.
To paraphrase the view of the lone and chronic dissenter on the rate-setting Federal Open Market Committee, Federal Reserve Bank of Kansas City President Thomas Hoenig, and a lyric from Bruce Springsteen, it’s already been one long emergency.
Hoenig wants the Fed to raise short rates to the still-quite-easy 1% and then pause and gauge the impact. That certainly reasonable step, of course, is not going to happen.
Irwin reports in the Washington Post that under consideration is the extension of the current blanket commitment to exceptionally low rates for an “extended period,” perhaps “adding specifics about which economic conditions would lead them to raise rates.” Irwin adds that some policymakers would be sure to object to this because of the limits it places on future Fed policy flexibility.
One would hope there are some objections. As it already stands, few expect the Fed to raise rates at all until at least the middle of 2011. That’s about a year away. Assuming that scenario, short rates will have stood at zero for more than a couple of years.
Time for the caveat: it’s good that the Fed, along with the rest of humanity, has noticed an apparent deceleration in the growth path of the U.S. economy from slow growth to marginal growth.
Marginal growth is not good. It won’t allow for any significant decrease in unemployment, which in turn won’t let growth climb much from marginal. Given this reality, the Fed should think about what else it could do.
But while the Fed should think about what it might do in a weakening economy scenario, the Fed should hold its fire. The central bank has essentially done what it can. To do more might simply be pushing on a string, loading liquidity into an economic scenario where it has no growth-acceleration power. That would simply make the Fed look weak and demoralize the rest of us.
The economy is in the process of a major deleveraging. It’s slow and painful and necessary and it will restrain growth for some time. But there are no short cuts. To try to take short cuts at this point will invite greater pain later on.