Fed Vows To Keep Interest Rates Near Zero

Originally published on August 10, 2011 5:05 am
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And even with some companies doing really well, there's still plenty of anxiety about gyrations in the broader stock market and over the health of the economy as a whole, and many are looking again to the Federal Reserve for help. The Fed threw out a life preserver yesterday. It announced it would hold short-term interest rates near zero until 2013. That's a remarkable decision. And to decipher it, we've called David Wessel, as we often do. He's economics editor of The Wall Street Journal. And we caught him on his vacation, so extra thanks this morning for joining us, David.

DAVID WESSEL: You're welcome, Renee.

MONTAGNE: Now, Fed said yesterday, as we just said, it would hold short-term interest rates near zero. That's two more years. Why did they think that would help?

WESSEL: Well, as you know, the Federal Reserve moved interest rates to zero in December 2008 during the worst of the financial crisis. And until yesterday, it had said only it would keep them there for it said was an extended period. Financial markets figured that meant some time maybe in the middle of 2012, late 2012. But because the economic outlook has deteriorated, the Fed wanted to do something to show that it was on the case. It took the unusual step, as you said, of being specific and says it will keep short-term interest rates near zero until 2013. It hopes this will help keep people moving money into stocks and bonds, riskier assets, so it'll help the economy keep moving. It hopes it'll keep long-term interest rates - the one that sent mortgages and the corporate borrowing rates down - and it basically is saying, look, we know the economy is a mess, we promise to keep our foot off the break for a long time.

MONTAGNE: Why not put its foot on the accelerator?

WESSEL: Well, that's a good question. And you can see in the Fed's statement that they discussed a number of tools. They didn't say what they were specifically, that would be more like putting the foot on the accelerator. Among the possibilities is changing the nature of its portfolio to try and help the economy, or maybe even buying another big chunk of long-term bonds just to put more money into the economy. But it looked like they just couldn't get consensus on doing more, and frankly, I think they're not sure what exactly more they can do to help the economy.

MONTAGNE: Although by saying that they're keeping interest rates low for two more years, very unusual announcement, it seems like they're saying the economy is not going to be very good for a rather long time. Is that why the markets initially reacted negatively to this announcement?

WESSEL: Well, I think they may have. I mean yesterday's market was baffling. You know, the stock market goes down as soon as the Fed announces its decision, then it soars later in the afternoon. It was almost as if they read the first few sentences of the Fed's statement, which were very long on gloom, and they got depressed. And then they saw, oh wait a minute, the Fed said they might actually bring some more of its firepower to the party and they got better.

I think the Fed has a very difficult thing - balancing act at a time like this. It has to be able to say, look, we understand the economy is bad and we want you to know that we're aware of that. But they also have to be careful not to say, look, things are really bad, because if the Fed is freaking out the rest of us will freak out. And I think they had some trouble with that balance yesterday.

MONTAGNE: They also came up with kind of a split vote - seven to three. Is that unusual?

WESSEL: It's very unusual. There haven't been three people voting against the chairman at the Federal Reserve's Policy Committee since 1992. And it's a reminder that although Fed Chairman Ben Bernanke is by nature an activist, not everybody else on the committee is. So the presidents of three of the regional Federal Reserve banks, the presidents of the Dallas, Minneapolis and Philadelphia banks, voted against this thing. That just shows you how - some of the constraints on the Fed chairman's ability to respond.

MONTAGNE: David, thanks very much.

WESSEL: You're welcome.

MONTAGNE: David Wessel is economics editor of The Wall Street Journal. Transcript provided by NPR, Copyright NPR.