Today, the Federal Open Market Committee, pictured above, will meet to decide what the Federal Reserve Bank will do about the economy, which is looking increasingly less stable -- maybe even double-dip unstable. Neil Irwin previews the fun:
One substantive option on the table -- and which has the highest likelihood of actually being taken, though it is no sure thing -- would be to state that the Fed will maintain the current size of its balance sheet, $2.3 trillion, by buying new assets as the mortgage backed securities in its portfolio mature. That would have only a moderate impact in terms of increasing the money supply, but would be a signal that the Fed has entered a more dovish mode.
A more "dovish mode," means that the Fed is willing to take steps to encourage growth -- namely, by keeping interest rates low and reinforcing inflation expectations. This is intended to spur much-needed investment and lending and boost demand to create economic growth and, ideally, an increase in jobs. Ironically, "dovish" really means taking some kind of action, while the "hawks" in this case want the Fed to do as little as possible -- in fact, even less than it is doing now -- in order to prevent inflation years down the road.
Irwin's whole post is worth reading, but as Matt Yglesias points out -- complete with a song from one of the first CDs I ever bought! -- steps ruled out as "too radical" by the FOMC are the same steps Fed Chair Ben Bernanke prescribed for exactly this hypothetical scenario as an academic, and no one has found a way to penetrate the Fed's opacity shield and ask him why.
In related news, a White House official tells me that President Obama intends to renominate Peter Diamond, the widely respected nominee to the Fed board whose nomination was returned from the Senate after a procedural objection by Republicans. Diamond would, presumably, be pressuring his colleagues for more aggressive policies.
-- Tim Fernholz
