The Federal Reserve is failing to achieve both of its legally mandated goals, full employment and stable prices. And yet it chose on Wednesday to do the absolute least it could do to change that.
The Federal Open Market Committee, at the end of a two-day policy meeting, announced it was going to extend a bond-buying program known as "Operation Twist" for another six months. Under this program, the Fed sells short-term debt and buys long-term debt. The goal is to keep long-term interest rates low to help the economy. There is some debate about how much the program has really helped, but it is likely better than doing nothing.
But extending the program was only just barely more than doing nothing. Former Dallas Fed President Robert McTeer told CNBC that letting the Operation Twist program simply end as scheduled at the end of the month would have actually made monetary policy less easy. Today's move is simply running in place.
What's more, the Fed did not add mortgage-backed securities to its Operation Twist menu, which might have helped drive mortgage rates a little lower for home buyers or refinancing homeowners.
Nor did the Fed take the more radical step of just outright buying up more Treasury debt and/or mortgage bonds, known as "quantitative easing," to pump more cash into the economy. The Fed has taken that step two times in the years since it drove its traditional policy tool, the federal funds rate, down to zero. The funds rate is an overnight bank-lending rate that affects other borrowing costs throughout the economy.
Nor did the Fed promise to keep that fed funds rate "exceptionally low" any longer than "through at least late 2014," a promise it has been making for several months already.
The Fed basically did what the market expected it to do, but there's always hope on Wall Street that the Fed might do everybody a favor and spring a pleasant surprise. It didn't.
As a result, the stock market recoiled briefly before stabilizing. The Dow Jones Industrial Average briefly fell about 90 points, after being down by about 30 before the Fed statement. It temporarily climbed into positive territory, as traders started to look to a 2:15 p.m. EDT press conference by Fed Chairman Ben Bernanke, where they hoped he might offer some hint of further action.
Wall Street hopes also hung on this little line added to the Fed's policy statement after Wednesday's meeting: "The Committee is prepared to take further action," which suggests the Fed is getting closer to doing more.
Update: We live-blogged the press conference, at the bottom of this post. Executive summary: Bernanke didn't do much to promise further action. Maybe for this reason, the Dow dropped 90 points shortly after the press conference, nearly back to its worst levels of the day.
In fact, Bernanke said repeatedly during the press conference that today's move was "substantive." But he was on the defensive -- several reporters wondered why the Fed didn't do more.
Certainly the Fed's outlook on the economy would seem to dictate more action. The Fed is tasked with maintaining full employment and stable prices, and it admitted that neither of those two conditions are in place right now:
[T]he Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. ... The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
The Fed statement also name-checked a recent slowdown in hiring and consumer spending. The Wall Street Journal's handy tool that lets you compare Fed statements shows plainly how much the Fed's outlook has deteriorated since its previous policy meeting.
The way things are going, the Fed is going to have to act again -- especially if Congress continues to resist stimulating the economy, as Bernanke has all but begged it to do.