The Fed Has Done Its Part, Now It's Congress's Turn

You've got to give Ben Bernanke an A for effort.

After months of signaling, the Federal Reserve pulled two guns out of its arsenal today: committing to a new, open-ended round of bond buying that will continue until the economy shows signs of improving, and promising to keep interest rates low through at least mid-2015.

In other words, the Fed will step on the gas for as long as it takes to jump- start the economic recovery.

That's already set tails wagging, given we're less than two months from a presidential election in which the economy is expected to be the deciding factor. But no matter to Bernanke -- Mitt Romney, the Republican presidential nominee, has already said he won't reappoint the Republican central banker to another term.

Still, it's unclear how quickly -- or even to what degree -- the Fed's move will have an impact.

On Thursday, the Fed said it would buy $40 billion of mortgage debt a month until the economy improves -- an important distinction from previous efforts since it means the Fed will stay in the game for an indefinite period of time. When combined with Operation Twist -- in which the Fed swaps short-term bonds for longer-term securities -- the central bank will pump about $85 billion into the economy each month through year-end.

The actions "should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative," the Fed said in its statement. Bernanke's belief is that flooding the market with cheap credit will incentivize consumers to spend and businesses to invest and hire.

Yet Bernanke himself has said monetary policy can only do so much, a position with which many economists agree. Interest rates, including mortgage rates, are already incredibly low, yet consumers and businesses remain reluctant to spend. One reason is that consumers are still trying to deleverage from the heady pre- financial-crisis days and aren't keen to load up on debt, no matter how cheap it may be to finance a house, a car or other big-ticket item. Businesses are sitting on huge sums of cash as they worry about demand and the inability of policymakers to deal with the very real fiscal problems threatening to  throw the economy back into recession.

The Fed's statement makes clear how far the economy still has to go, citing sluggish job growth, an "elevated" unemployment rate and a slowdown in business investment. By making its bond purchases open-ended, the Fed is sending a message to the market that it will be there as long as necessary, a commitment that helped send stocks higher after the announcement. But the overall impact, while helpful, is unlikely to solve the economy's broader woes.

The answer to that riddle lies with Congress, which needs to enact some type of short-term stimulus to give consumers confidence to spend while dealing with the fiscal problems that threaten to inflict huge pain on the U.S. in the long- run. Today's move shows Bernanke is willing to do what it takes to get the economy moving, but he can only do so much. Like it or not, true economic salvation rests with Congress.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)

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