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At Least We Have the Fed

January 26, 2012 at 4:59 PM

The Federal Reserve signaled this week that it still has the weak economy on its radar screen and sees no imminent threat of inflation.  That’s welcome news, because an accommodative, low-interest-rate monetary policy is the only game in town right now for nurturing the struggling economic recovery.

As I posted yesterday on U.S. News and World Report’s new “Economics Intelligence” website, economic and budget policy will likely run on autopilot this year in the run-up to the November elections.  We can’t realistically expect any bold policies to bring down the jobs deficit; this Congress will have a hard enough time doing the bare minimum, namely, extending the payroll tax cut and extra weeks of unemployment insurance through the end of this year.  (Both are due to expire at the end of February.)

Fiscal and budget policy gridlock may be our friend at a time when there are worse alternatives, such as actually enacting the misguided “reforms” to the budget process now working their way through the House or pursuing the discredited idea that sharp, immediate spending cuts are the best way to boost the recovery.

That leaves it up to the Fed.  Though still subject to sniping from those who believe inflation is a more serious threat than continued sluggish economic growth, the Federal Open Market Committee stated yesterday that it will keep short-term interest rates near zero through late 2014, arguing that “economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate.”  The Fed may even be prepared to take further action, as the economist Tim Duy observes.

With Congress largely on the sidelines for now, we should be thankful the Fed is not listening to the inflation hawks.  And let’s hope that additional steps are indeed in the cards.


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