Running out of options, Fed prepares to jolt economy

Zachary Roth
November 1, 2010
Ben Bernanke
Ben Bernanke

Much of the media's attention is focused on Election Day. But another event Tuesday could have a far greater effect on the one overriding issue that looks likely to lead to major Republican gains.

The Federal Reserve, at a meeting of policymakers Tuesday and Wednesday, is poised to take dramatic steps to jolt the economy awake. With Ben Bernanke and Company running out of conventional tools to address the slump, the moment is one of the most crucial since the downturn began nearly three years ago.

The Fed has already pumped money into the economy by buying over $1.7 trillion worth of Treasury bonds, but this week it's expected to announce an additional $500 billion purchase, and may indicate a willingness to buy more.

Some analysts see pitfalls to the move. "The greatest risk for the Fed in taking this action is that it could extend the economy's funk by giving a sense that either no one is in charge or that the people who are in charge can't get it right," David Shulman of the UCLA Anderson Forecast told the Washington Post. "The whole psychology of that could leak back into the economy."

And if the Fed overshoots, it could produce the same kind of bubbles that helped get us in the fix we're in now.

But the downsides of not acting may be greater. Unemployment is currently stuck around 9 percent, and the economy isn't growing fast enough to raise it. Meanwhile, inflation, at around 1 percent, isn't high enough to encourage consumers to spend money.

In fact, some think the Fed isn't thinking big enough. Larry Meyer, a former Fed governor now with Macroeconomic Advisers, recently argued it will take more than $5 trillion worth of bond purchases to jolt the economy. Fed leaders have said that's too risky.

But it's not clear what options they'd have if this week's expected action fails to stimulate sufficient growth and bring down the jobless rate. Some analysts, including Daniel Gross of Yahoo! Finance, argue that monetary policy can only do so much. They say that the nearly trillion-dollar stimulus measure passed last year wasn't enough, and that Congress and the Obama administration should act again with additional spending.

With Republicans poised to make gains Tuesday after a campaign that stressed the need to cut spending, that looks unlikely.

(Photo of Bernanke: AP/Dennis Cook)