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The Federal Reserve Is Naked

Unemployment is above target and inflation is below target, and the Fed is doing nothing. What?

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(Reuters)

Psst, Ben Bernanke. This is kind of awkward ... but we can tell that you have no clothes.

The Fed's intellectual nakedness has been apparent for awhile now. The past few months it has said that it expects unemployment to stay above target and inflation below target, so it will do nothing. But it might do something if things get worse -- and by "worse", it means that things stay as bad as they already are. If you're wondering why things being this bad in the future would justify action, but things being this bad now doesn't, you are not alone. 

In other words, the Fed's August decision to sit pat despite 8 percent unemployment and sub-2 percent inflation wasn't surprising. That doesn't mean it shouldn't shock us. This nifty feature from Phil Izzo of the Wall Street Journal lets us see how little the Fed's August statement changed from its June statement. (Note: New parts are highlighted in green; deleted parts are in red).

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FedFail.png

Shorter Fed: The economy is getting worse, and we're getting closer to doing something about it -- but not yet.

This just isn't good enough. Long-term unemployment is still at previously unthinkable highs. Inflation is still below 2 percent, and is expected to stay below 2 percent for the next five years. It's well past time for the Fed to do more. Something like Chicago Fed president Charles Evan's plan to keep rates at zero until inflation is above 3 percent or unemployment is below 7 percent would be a good start. Or San Francisco Fed president John William's idea about open-ended quantitative easing -- basically, printing money until the economy hits some target. Or combine them! 

If the Fed won't do more, so-called doves like Williams should start dissenting from the committee's do-nothingism -- something none of them did in August, but Charles Evans did last year when he had a vote.

Maybe then Bernanke would get the message that it's time to put some clothes on.
Presented by

Matthew O'Brien

Matthew O'Brien is a former senior associate editor at The Atlantic.

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