Economy: What's Left in Bernanke's Toolbox?
Unmentioned but not impossible: Last-ditch options.
Aug. 25, 2011 -- Federal Reserve Chairman Ben Bernanke goes before the microphones on Friday to announce what, if anything, the Fed will do next to buck up the stumbling and disheveled U.S. economy. Critics question whether the Fed has anything left in its toolbox it hasn't already tried. The box, they insinuate, is empty--or virtually so.
Is that true? Does the Fed really have no new means at its disposal?
The world's stock markets seem to believe otherwise. They rose this week, in part on anticipation that the Fed will take new steps to keep the U.S. from sinking further into recession.
Truth is, there's plenty the Fed still could do. A number of unused tools remain, but none is without controversy. Some, politically, are too hot to touch. And still others are so potent that their use cannot be imagined, short of some doomsday scenario.
It was just one year ago that Bernanke announced a second round of so-called "quantitative easing," dubbed QE2. As with its predecessor, QE1, announced in March 2009, the idea was for the Fed to buy private debt on a massive scale, thus keeping interest rates low and invigorating the U.S. economy with a booster of inexpensive cash. The stock markets of the world have benefitted, and traders this week were cheered at the prospect that Bernanke, on Friday, will announce QE3 or something like it.
It's far from sure, however, that Bernanke will choose that tool.
The effectiveness of first two QEs has been questioned. Critics acknowledge that easing has brought temporary benefits, but they argue those have accrued primarily to the stock market. They question whether flooding the markets with yet more cheap money is a good thing for the economy long-term.
Lance Roberts, chief strategist for Streettalk Advisors, calls quantitative easing just so much "heroine." The first two shots of it, he says, indeed invigorated markets. But the effect was short-lived. Another round of it might help the U.S. "temporarily avoid a double dip," but it would not solve "our long-term fiscal problems."
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