Federal ReserveChairman Ben Bernanke may be willing and able to provide more monetary stimulus for the U.S. economy, but the more effective medicine—fiscal aid out of Washington—isn’t in the wings, say economists.
“The Fed had s done about just as much as it can do to speed up the pace of recovery,” said longtime Fed watcher David Jones of DMJ Advisors.
Jones and other economists, who have been both critical and complimentary of the Fed, say they understand the market’s fixation with a Fed rescue package and Bernanke’s Jackson Hole, Wyo., speech Friday morning, but it is inappropriate at this point of the economic cycle.
“They’ve been conditioned to do it,” said Jones. “It’s so typical. Take (the second round of quantitative easing) . You could hear the equity analysts call for it as the stock market weakened.”
“It means they recognize the Fed is the last game in town,” said Robert Brusca, chief economist at FAO Economics. “At the same time, the law of diminishing returns applies to the Fed's monetary policy.”
If so, both the Fed’s choice of remedies and its impact are likely to lead to disappointment.
“There’s a little bit of desperation," said Scott Anderson, senior economist at Wells Fargo Securities. “This time it’s a bit different." The Fed’s 2009-2010 mortgage-backed-securities purchase program, or QE1, was a lot more effective than QE2, he said, adding "the biggest impact this time might be the psychological boost.”
Right now, the consensus is that a third round of easing, like the second round, would also involve Treasury purchases, but the goal would be to push down interest rates on long-term debt at the expense of short-term debt.
“If 600 billion dollars wasn’t a enough, then try a trillion dollars,” quipped Chris Rupkey, managing director at Bank of Tokyo-Mitsubishi. “In this low-rate environment, buying Treasurys is the only game in town.”