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Fed May Move To Lower Interest Rates Further


Federal Reserve officials reveal this afternoon what, if anything, they're going to try next to resuscitate the U.S. economy. To talk about what they might do and some new political pressure the Fed is feeling, we turn to David Wessel, economics editor of The Wall Street Journal. Good morning, and welcome back, David.

DAVID WESSEL: Good morning, David.

GREENE: So can the Fed do anything today that'll make a big difference to the economy, to jobs?



WESSEL: They'll do something, probably. They might reduce the already low interest rate - it's a quarter percentage point - that they pay banks that put extra money on deposit at the Fed. The theory is that would the banks a little more incentive to lend the money out to people instead of just leaving it at the Fed. And they might reorganize their huge portfolio of government securities to push down already low long-term interest rates. This is a move that has been called Operation Twist. But neither one is likely to be a magic cure for the economy. At best, it'll be a modest help.

GREENE: Operation Twist - it sounds sort of like a dance they're doing. I mean, you say that these are modest steps. But they already seem to be generating some controversy, some criticism from Republican politicians. What's going on?

WESSEL: Yeah, it's really interesting. First, we had four of the presidential Republican candidates piling on criticizing Federal Reserve Chairman Ben Bernanke, saying they wouldn't reappoint him, saying what he's been doing is inflationary. And yesterday, four top Republican leaders in the House and Senate released a very unusual letter to Mr. Bernanke, asking him not to do anything more to help the economy for fear that whatever he does could hurt it. It's unusual because politicians almost always want the Central Bank to do more - lower interest rates, put more credit in. But the Republicans are saying no, don't do that. Apparently, they see the Fed as very unpopular with the voters and see Mr. Bernanke as an ally of Barack Obama, and have been convinced by critics of the Fed that what the Fed's been doing is making things worse rather than better.

GREENE: And what's their central argument, briefly? I mean, are they saying that the Fed could be exacerbating the problems?

WESSEL: Well, basically, they say that the things that the Fed did didn't help the economy. They actually suggest that they may have hurt them. And they cite a number of economists - a minority, to be sure - who say that the steps that the Fed has taken are at risk of creating a lot of uncertainty - which you know is a big Republican concern at the moment - and could create inflation down the road, where the Fed thinks just the opposite, that we don't have too much inflation down the road.

GREENE: Does the Fed usually respond to this kind of political pressure? Does it make a difference?

WESSEL: Well, Fed officials say they don't respond. Mr. Bernanke's view is that the law gives him a mandate: aim for stable prices and maximum employment. His forecast is that inflation will be below the Fed's target, unemployment will be way above the Fed's target, so he has an obligation. If there's anything the Fed can do to help, it should do it. But it's hard to believe that this kind of political pressure doesn't play some role in Fed thinking, especially when it's uncertain about whether the tools it still has can make much difference. I mean, the Fed was stunned by the adverse political reaction when it decided last year to buy $600 billion in long-term treasuries to try and help the economy. And although it is meant to be independent of elected political leaders, it is, after all, a creature of Congress. It's accountable to Congress. So it's hard to believe they ignore it.

GREENE: And briefly, David, I guess it's worth mentioning, this is a period where there's some deep internal divisions inside the Fed.

WESSEL: Absolutely. One of the reasons the Republican elected officials are emboldened is that there's three or four people on the Fed's 17-member committee who agree with them and think the Fed shouldn't do any more for fear that if the Fed does too much now, we'll get too much inflation later, and they feel that that's the worst thing the Fed could do for the economy.

GREENE: All right. David Wessel, economics editor of the Wall Street Journal, thanks as always for joining us.

WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.