Fed Committee Reviews Economy's Health
Federal Reserve officials were meeting this week to decide how much more credit to pump into the U.S. economy. To find out what they're likely to do — and why — Renee Montagne talks to David Wessel, economics editor of The Wall Street Journal.
RENEE MONTAGNE, HOST:
And here in the U.S., while the back-and-forth over taxes and spending goes on, the Federal Reserve is meeting this week to decide its next step. Specifically, Fed officials are deciding how much more credit to pump into the economy to help speed up growth.
To find out what they're likely to do, and what the thinking is, we turn now to David Wessel, he's economics editor of The Wall Street Journal.
DAVID WESSEL: Good morning, Renee.
MONTAGNE: So exactly what is on the Fed's plate today?
WESSEL: Well, the Fed's policy committee wraps up a two-day meeting this morning. And they've been discussing the health of the economy and the efficacy of what amounts to a grand experiment and how a central bank can resuscitate its economy years after its cut the short-term interest rates it usually depends on to zero.
At 12:30 Washington time, they'll say what the committee has decided to do in a statement that will be closely scrutinized by the markets. At 2 PM, they release updated economic forecast. And then at 2:15, Federal Reserve Chairman Ben Bernanke will begin taking questions from reporters to explain what they did and why.
MONTAGNE: And what is the big decision the Fed has to make at this meeting?
WESSEL: The Fed has been doing two things to push down long-term interest rates, the ones that companies pay to borrow and homeowners pay on their mortgages. It's been buying $40 billion a month in mortgage-backed securities, another $45 billion a month in long-term treasury bonds. It said in October it wants to keep doing this until the job market improves substantially. So today, it has to decide - is the job market good enough so they can stop doing this, or should they keep buying bonds at this very rapid pace?
MONTAGNE: And the market - that, of course, is always is concerned with these sorts of things, what's it preparing for?
WESSEL: Well, you should be concerned too, Renee, you know?
MONTAGNE: I am concerned, David.
WESSEL: The market expects the Fed to decide the job market, though a little better, isn't improving fast enough, and it'll keep buying mortgages and treasuries and some mix that adds up to about $85 billion a month.
MONTAGNE: What does that mean? What does that translate to?
WESSEL: Well, what - basically what they're doing is they're saying that the economy still needs the Fed to have its foot on the gas pedal, and they want to push down the long-term interest rates. And the only way they can think of doing that is basically printing money and using that money to buy bonds which pushes down long-term interest rates and forces investors to look for other places to put their money, maybe the stock market, which the Fed thinks will help the economy heal a little faster.
MONTAGNE: Now, the fiscal cliff. We can't ever have a conversation without saying those words.
MONTAGNE: And so let's, how do the negotiations over the fiscal cliff figure into this?
WESSEL: Well, Mr. Bernanke has said that there is nothing the Fed can do that would protect the U.S. economy from the shock of sharply higher taxes and spending cuts if Congress and the president can't agree on some alternative to the fiscal cliff by the end of December. But the Fed has also made clear that one big factor in its decision to keep doing this extraordinary monetary policy experiment is that it wants to offset the harm that it expects will be done when the federal government has - applies a little spending restraint and raises taxes, which it expects one way or the other to happen in 2013. What the federal government, the Congress and the president is doing, is retarding the growth of the economy in the short run for some long-term benefit. The Fed is trying to do what it can to offset that because the economy is growing so slowly now.
MONTAGNE: Now, just briefly, the Fed used to worry a lot and talk a lot about inflation. What's happened to that?
WESSEL: Well, you're right. You don't hear much about inflation these days because there isn't very much of it. The Fed has set a target of 2 percent for inflation. Mr. Bernanke said the other day that it's been - inflation has been at or below that target for the past three years. So they look at inflation but they say that's not a problem, we have to get the unemployment rate down and that's why we're doing what we're doing.
MONTAGNE: David, thanks much.
WESSEL: You're welcome.
MONTAGNE: David Wessel is economics editor of The Wall Street Journal. Transcript provided by NPR, Copyright NPR.