Fed can't do it all

by By Boston Herald editorial staffYesterday 0:00 AM

With Janet Yellen now the leading (and perhaps only) candidate to succeed Ben Bernanke as chairman of the Federal Reserve Board, Congress should turn its attention from personalities to realistic limits on what the Fed should try to do.

Bernanke and the Fed's Open Market Committee unexpectedly have decided to keep buying $85 billion a month in Treasury and mortgage-backed securities with printed money. These purchases allegedly are necessary to prop up a weak economy.

This "quantitative easing" or QE has had little effect on the economy since 2008-2009. In 2011 the Fed expected growth in Gross Domestic Product of 3.5 percent to 4.3 percent in 2013, an expectation that has steadily fallen to the current 2.0 percent to 2.3 percent - probably optimistic given growth in the first half of 2013 of 1.8 percent.

QE supporters would argue that matters would have been worse without it, but that's hard to accept. Little of the money the Fed has created (around $2 trillion) has flowed into the economy. Banks and business are sitting on piles of unlent and uninvested cash. Business can withhold new investment, but "worse" would mean negative new investment - practically impossible.

It's hard to see why some commentators are arguing that economic growth should be a statutory objective of the Fed. The Fed always has aimed at price stability; in 1978 Congress required it also to maximize employment. That's an objective related to growth. Unemployment throughout the almost five years of QE has remained high - it was 7.3 percent in August.

Congress should make the Fed concentrate on price stability, leaving massive money creation to the emergencies it knows how to handle such as the threatened 2008-2009 financial freeze-up.