Faced With The Obvious, The Fed Will Do Nothing

The Fed is expected to do nearly nothing as its members meet during the middle of this week. That nothing is in the face of what is now almost certainly a recovery which is beyond the wildest dreams of most economists. The Fed, by most accounts, was instrumental in saving the financial sector and economy by providing liquidity to banks and parts of the fixed income markets. It seems that it wants to turn its back on that success and act as if it had never happened.

The Fed is expected to leave interest rates unchanged, near enough to zero percent to be free money. That will be an odd action, particularly since some members of the FOMC predicted in June that GDP would begin to move up later this year and start a very brisk recovery in 2010. Those predictions came before the particularly good economic numbers of the last few weeks.

The Fed may simply elect to take an ironic role being almost completely inactive as GDP recovers instead of hyper-active as it was in the midst of the crisis. It will look good if it stays out of the way of the recovery to whatever extent it can, which will probably mean it will keep a careful eye on inflation and remain largely inert on other issues like its previously aggressive actions of buying mortgage debt and Treasuries.

The Administration is attempting to broaden the role of the Federal Reserve to make it some sort of uber-regulator. Fed chief Bernanke’s enthusiasm for the plan has seemed lacking as he has testified on regulatory matters in front on Congress. He is an academician and student of Fed history. It has occurred to him long ago that the Fed’s best days were probably when it operated at arm’s length from both the White House and Congress. It was at its finest, not a political vehicle. It held the center by providing monetary policy from its Olympus. Mortals had to live with the consequences of the fact that the Fed was not interesting in Gallup polls.

Bernanke and his brethren at the Federal Reserve may actually say as little as they can about the economy this week and in the weeks and months in the future. The Fed has been overexposed by historical standards. Bernanke finds himself on “60 Minutes” and is likely to be both the Time Magazine and People Magazine “Man of the Year”. That is humiliating even though it may be a crass sign of success. It would not be appropriate for the Chief Justice of the Supreme Court to show up on “The Tonight Show.” The chair of the Fed does not belong in that company either.

The rest of the year may not be terribly restless in the economy, at least not compared to the last year-and-a-half. Much of Washington will get to overplay its hand now. Congress will boast about its role in the recovery as will people in the Administration. They will try to leverage the perception that they played some heroic part into political capital as the war over the deficit and healthcare costs becomes wider and consumes more of the headlines and the energy of the combatants.

Bernanke is better off taking his four weeks of vacation now than he is being enmeshed in the wild debate over how the government will spend its money and what the myriad benefits of that will be. Unemployment rates and and the GDP will probably not make anymore sudden moves this year. The Fed can do nothing and take credit for that, too.

Douglas A. McIntyre