By Teresa Welsh |
The Federal Reserve is supposed to do two things: keep inflation low and keep employment high. At the first of these jobs, the Fed is exceeding its mark: Inflation flatlined at zero percent in June.
At its other job, the Federal Reserve is not doing so hot. Nearly five years since the rampant financial largesse fueling the 2000s economy popped and plunged us into recession, the American economy is recovering. Slowly. But despite progress, unemployment still stands unacceptably high.
As Federal Reserve Chairman Ben Bernanke indicated in congressional testimony this week, the Fed still has a lot of tricks up its sleeve. With no inflation in sight, there is almost no downside risk from trying (and almost certain downside risk from not trying) sensible, though unconventional, action. After all, these are unconventional economic times.
To its credit, Federal Reserve monetary policy responded aggressively to the unfolding crisis. The same cannot be said of the conservative lawmakers in this do-nothing Congress since 2010, and our government's other macroeconomic tool: fiscal policy.
The Fed is not solely responsible for stewarding America's economic strength. Congress should be doing much more, but is paralyzed with political obstruction. Still, Bernanke and the Fed have the authority and technical capacity to strengthen the economy and put millions of people back to work: They should ease monetary policy again, and not stop there.
First, the Fed can focus quantitative easing on student debt, municipal bonds, and securitized consumer credit that would grease the wheels of investment while providing relief that reaches beyond Wall Street to cash-strapped local governments and middle-class families.
Second, the Fed should use its power to "ease" on foreign exchange markets, particularly against currencies that maintain artificially low values relative to the dollar. Such rebalancing would restore the global competitiveness of U.S. exporters and domestic producers alike, attract foreign investment, and spur job creation at home.
Third, the Fed should commit to a full employment target and pledge to do whatever is necessary to reach that target. Only then can the Fed make credible its mandate to maximize U.S. employment as equal to its responsibility to manage the U.S. monetary and financial system.
About Adam Hersh Economist at the Center for American Progress
Steven Horwitz Mercatus Center Senior Affiliated Scholar
Daniel Hanson Economics Researcher at the American Enterprise Institute