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The Washington Independent
The Washington Independent

What Can the Fed Do About Unemployment?

Today, The Washington Post’s Neil Irwin reports that the Federal Reserve -- concerned about the sustained high level of unemployment and the general stall-out

Kenzo Norman
News
Last updated: Jul 31, 2020 | Jul 08, 2010

Today, The Washington Post’s Neil Irwin reports that the Federal Reserve — concerned about the sustained high level of unemployment and the general stall-out in the recovery — is considering taking steps to bolster growth. Irwin summarizes the “modest” possible measures:

One pro-growth strategy would be to strengthen language in Fed policy statements that the central bank’s interest rate target is likely to remain “exceptionally low” for an “extended period.” The policymakers could change that wording to effectively commit to keeping rates near zero for even longer than investors now expect, perhaps adding specifics about which economic conditions would lead them to raise rates. Such a move would be opposed by many members of the Fed policymaking committee who are wary of the “extended period” language, arguing that it limits their flexibility.

Another possibility would be to cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25 percent to zero. That would give banks slightly more incentive to lend money to customers rather than park it at the Fed, although it also could cause technical problems in the functioning of certain credit markets.

A third modest possibility would be to buy enough new mortgage securities to replace those on the Fed balance sheet that are paid off as people take advantage of low interest rates to refinance.

Irwin, Matt Yglesias and Kevin Drum all note that this is pretty weak tea, particularly when compared with the $1 trillion the Fed pumped into the economy in the midst of the credit crunch, or its massive mortgage-backed security buy-up program. (Drum’s headline? “Fed to Unemployed: Drop Dead.”) Yglesias notes, “My bottom line is that people ought to realize that as a matter of practical politics additional expansionary policies are much more likely to come from the Fed than from the United States Senate at this point. Opinion leaders need to focus more attention on this lever.”

But the measures the Fed could take would be more tangential than the ones Congress could. (Expansionary fiscal policy does not translate into jobs as quickly as, say, giving money to states to keep employees on the payroll.) For that reason, I wonder if the Fed would attempt to convince Congress to tackle the unemployment rate head-on. Fed Chair Ben Bernanke could testify that the Hill needs to enact policies to lower the unemployment rate, or else the Fed will have to act — a less efficient and more politically troubling eventuality. And the Fed could include dire warnings about the stalled-out recovery in its minutes.

There are enough members of Congress interested in aiding the jobless and keeping the Fed off of its turf that I can imagine it might help win over those one or two Senate votes necessary for big, ambitious bills. Granted, the Fed is not really meant to be a political actor in this way. But it is there to advise lawmakers, and its mandate is to put jobs and stability first.

Kenzo Norman | Kenzo is a journalist-turned-marketer who is fascinated by how storytelling and targeted marketing can result in content that changes businesses. He is responsible for implementing inbound marketing strategies that help his clients raise brand awareness, generate leads, and gain new customers as an Account Executive. Jason enjoys reading on the beach, tracking down mono records, and playing guitar when he is not working.

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