A Vote of Confidence From the Fed
In The Courage to Act, Ben Bernanke’s engrossing memoir of his tenure at America’s central bank, the former Fed Chairman notes his growing realization that the crisis that engulfed the U.S. and global financial systems in the fall of 2008 wasn’t just the worst since the Great Depression. It was, as he concluded, the worst in human history. In many ways, it is possible to draw a line from that daunting assessment to the remarkable buildup to today’s FOMC action of raising the target for the federal funds rate by a small 25 basis points. Outside of the 2008 crisis, there have only been a handful of meetings in the more than 100-year history of the Federal Reserve that have received the 24/7 buildup that was seen in recent weeks.
As Bernanke’s statement reminds us, the financial crisis was traumatic. The confidence that Americans had in the basic functioning of the economic and financial systems that are crucial to our welfare and our futures was shattered. And the only thing that stopped a crash from turning into a generational disaster was the quick action of the Federal Reserve and a few other central banks. Fiscal policy, an area that generally has greater impact on long-term economic performance, has been tied up in frustrating political knots.
Seven years have now passed since the fateful fall of 2008. It is a testament to the severity of the crisis that we are still haggling over 25 basis points on the target for an overnight funds rate. But broader circumstances also testify to the resilience of the American economy. In spite of widespread weakness and instability in key economies outside of the U.S., a strange set of imbalances in the domestic U.S. economy such as the lowest labor force participation rate in nearly four decades, and destructive political dysfunction, the American economy has not only managed to grow but is creating jobs at a consistent and even impressive rate.
Perspective is important. U.S. GDP growth has most certainly been disappointing. The American economy has not logged 3% annual growth since 2005 and there are growing questions about potential growth. Such uncertainties are clouding the picture for monetary policy. But the longer the Fed waited, the harder it would become. Fears would continue to grow about the impact and ability of the crisis-weary American economy to absorb even modestly higher interest rates. Further, there would be growing institutional concerns about the functioning of the Federal Reserve and its capacity to respond to the shocks that seem to occur with increasing frequency these days.
So in this holiday season, the Fed decided to show confidence. Putting worries and risks aside, they began the process of removing the training wheels and letting Americans realize that their economy can produce and prosper without emergency actions.
We are still in a post-crisis era and the future is quite uncertain. But for now we have a vote of confidence from an important source to take into the new year.