Written by:
Thomas Loeffler

Bernanke: The Most Power…less Man in America

What can the Federal Reserve Chairman do when the interest rates are near zero, banks are unwilling to lend, and people are reluctant to spend? In the state of our current economic conditions, the answer is nothing. The Fed Chairman will usually announce to alert ears when he steps up to the podium for comments about the direction of the Reserve’s monetary policy, and more specifically, the direction of interest rates. Over the last few weeks, however, attention has dissipated due to several months’ worth of comments very similar to, if not the same as, “interest rates will continue to remain low for an extended period.” As arguably one of the most influential officials in the world, the Fed Chairman has the power to influence markets to sink or soar, until now. Bernanke’s recent reports fail to induce reaction from the public because banks are trying to regain capital on their balance sheet. Until the Fed sees increased lending, signaling confidence, interest rates will remain near the same low levels they have been held for months. Consequently, there is no anticipation to the Chairman’s comments. With no news to report on the tools they have been using, the Fed may be running short with the number of levers available to pull for monetary policy.

Among these levers available to the Fed are open market operations, discount rates, reserve requirements, and the last resort, moral suasion. The latter, pressure from the Fed to adhere to their policy, has been a part of the most recent effort from Bernanke & Co. as they have held forums with officials to encourage small business loans. Reported recently in The Wall Street Journal, Tom Barkley reported the following of the Fed’s latest activity:

“Fed officials have hosted more than 40 meetings around the country with small businesses, bankers and community leaders to identify obstacles that have contributed to a continued contraction in lending.”

Held with the best of intentions to motivate decision-makers, the meetings’ results are limited to the actions taken (or not) by the bank officials and other businesses men and women when they leave the room. Thus, the lack of effectiveness from these meetings and other levers pulled by the Fed has left monetary policy at a standstill. Encourage all they want, the Fed cannot inject any more confidence into our banking system because they have run out of tools to use. Banks must reach a point on their balance sheet where they feel like they can take on the risks associated with lending to small businesses. The stagnation puts monetary policy’s counterpart, fiscal policy, up to bat. Does the United States need stimulus and austerity?

Photo courtesy of Flickr.