NEW YORK (
The Federal Reserve is meddling too much in the economy. The Fed isn't doing enough for the economy. The Fed fails at forecasting the future.
These are just some of the criticisms lobbed at the nation's central bank. But really we should quit whining and perhaps give Bernanke and his peers some credit for their work.
For starters, we just got the best piece of economic news so far this year. Friday's jobs report from the government showed more than 240,000 net new jobs in January, way more than the 150,000 forecast by economists, according to
. While this welcome surprise raised questions over the Fed's latest pledge to keep interest rates low for longer, it's important to note that without the bank's loose monetary policy since the 2008 financial meltdown, there's no guarantee that the jobs market would even be in the position that it is in today.
The Federal Reserve's efforts to help prop up the economy include keeping interest rates near zero since December 2008, buying up more than $2 trillion in government debt and mortgage-backed securities, pursuing two rounds of quantitative easing and a number of smaller changes in recent months. In September, the bank announced "operation twist" to shift some of its holdings from short to long term Treasuries. And this January, it said it would hold off on raising interest rates until late 2014.
The bank has taken a number of nontraditional measures to help the economy recently. The "operation twist" method was considered rather unconventional. And, as the bank perhaps realized the limitations of monetary policy change, the Fed chief called on political leaders in both Washington and Europe to step up to make difficult political decisions.
Yet, it seems that whichever way the economy turns, up or down, blame gets passed onto the Fed. If economic data gets worse, it's why isn't the third round of quantitative easing coming earlier? And, if economic data gets better, it's why is the Fed still so downbeat on the economy?
The jobs data, in particular, seems to have confirmed for many experts that the economy is headed for a brighter future. As economists from PNC put it: "This strong January jobs report drives a stake through the black heart of the 'double-dipper' vampire economists."
Unemployment eased to 8.3% from 8.5% over the course of last month. A measure of the unemployment rate that includes Americans who want jobs but gave up looking also fell slightly.
All this is to suggest that the Federal Reserve is overly bearish, according to some experts. In a release at the end of January, the central bank said that unemployment would fall no lower than 8.2% this year and no lower than 7.4% by the end of 2013. The longer run unemployment rate is estimated between 5% and 6% by the Fed.
The concern is that if the Fed's assessment of the economy is off track, then its policy judgements must be off as well. Some economists were surprised that the Fed decided to keep interest rates low for an additional 18 months. Last year, the bank's intention was to keep rates low until mid-2013.
Amid all this doubt, however, it's worth noting that the Federal Reserve is not completely off in its forecasts. The bank continues to stress the risk of external shocks to the economy and the "uncertain" outlook, which few economists could argue with. And, Bernanke's description of the jobs market still holds true even after Friday's payrolls surprise: "We still have a long way to go before the labor market can be said to be operating normally," he said in a speech before Washington D.C. on Feb. 2.
For its part, the central bank has been absolutely clear in communicating its intentions with the public. To help improve how it conveys its outlook on the economy, the Federal Reserve even decided to publish for the first time projections from each Fed official of where rates will be in coming years. Secondly, the central bank has been clearer than ever in its goals for inflation and unemployment -- it has emphatically said it wants to lower unemployment while targeting inflation near 2%.
Why is it that the best economists in the world can miss a jobs forecast by such a wide margin, but it is unacceptable for members of the Federal Reserve to be slightly off in their numerical projections?
The central bank reserves the right to withhold a third round of quantitative easing if the economy doesn't warrant further stimulus. Investors looking for a short-lived rally from such an announcement no doubt would be disappointed. But, no one should be complaining if that is indeed what happens. After all, no medicine means the economy can recover to health just fine by itself.
-- Written by Chao Deng in New York.
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