Why the Fed Sat on Its Hands

The central bank lacks the tools and internal resolve to act, say some

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The stock market took a tumble this afternoon and bounced back up (the Dow closed up 400 points) following a much-anticipated Federal Reserve announcement that the central bank would keep interest rates low until at least mid-2013. A number of progressive economists had hoped the Fed would implement a third round of quantitative easing and accused it of sitting on its hands. As the headline from the Washington Post's liberal columnist Ezra Klein reads: "Meet the new Fed policy, (mostly the) same as the old Fed policy." So why didn't the Fed take more drastic action to ease investor worries and combat unemployment?  Here's what finance experts are saying:

Bernanke didn't act because he's given up, writes Agustino Fontevecchia at Forbes. "The Bernanke Fed has admitted the economy continues to remain depressed, essentially admitting that both programs of long-term asset purchases, or quantitative easing, have failed to prop up output after what has been the worst recession since the Great Depression." he writes. “They have realized that anticipated inflation for early 2012 isn’t going to happen,” adds Frank Fantozzi, CEO and chief investment strategist of Planned Financial Services.  “[They’ve accepted] that we only received supply-side inflation from raw materials.”

There wasn't enough internal support for more quantitative easing, writes The Atlantic's Dan Indiviglio, noting that three members of the Fed's monetary policy committee didn't even want to pledge to keep interest rates low. "That's some serious dissent from a committee that usually acts in unison, or near-unison. It also indicates that additional monetary stimulus probably never had a shot," he writes. "If these three members weren't even on board with something as comparably benign as altering the meeting statement's language about policy, then it's hard to see how there could have been near-sufficient support to inject additional money into the financial system."

The Fed doesn't have any tools left at its disposal, says Columbia Business School professor David Beim, in a statement to The Atlantic Wire. "They do not have any effective tools available to help the economy.  The classic macroeconomic prescription of easy monetary policy has been used to the max, together with 'quantitative easing,' together with very loose fiscal policy, and these have not budged the economy. This is because the obstacles to economic recovery lie elsewhere:  over-indebted consumers, over-built real estate and under-educated workers.  Fixing these structural problems in a short time frame, however, is unlikely. Throwing more money at them is ineffectual.”

Dissent: actually, Bernanke had a number of tools at his disposal, says Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics speaking with The Washington Post: "They should do a major QE3. It’s long overdue at this point. I think QE2 was just way too small to matter. You need big numbers in these things. It’s not like spending. It’s a swap of two different types of assets. So the effect is much, much smaller than if you were spending the same amount of money. So I would start with $2 trillion and say that we have an unlimited capacity to do this and we will do however much is necessary to get the economy moving. Build the expectation that this is just a downpayment. This is the problem the Bank of Japan had, where every time they did something, they immediately said this is the most we can do and we can’t wait to stop doing it. You want to be bold and say this is not our last bullet and we can and will do more if we need to."

This article is from the archive of our partner The Wire.