With Congress so twisted in partisan knots it is unable to jump-start the anemic economy, the Federal Reserve has stepped in to do what it can. Fed chairman Ben Bernanke made a welcome decision last week to embark on the third round of quantitative easing since 2008, in which the central bank will buy billions of dollars per month in mortgage bonds until improvements are seen in the labor market. This open-ended commitment means Bernanke won't stand on the sidelines, as Republicans in Congress have demanded, and will responsibly act to promote economic stimulus and job growth with the limited tools he has available.
Bernanke's bold step is a recognition that the country's troubling unemployment rate, now at 8.1 percent, can't wait to be addressed. The Fed chairman's job is twofold: to police prices and maximize employment. In the past, central bankers have focused on keeping inflation in check, with less interest in whether the country had enough full-time jobs. But with inflation holding at around the Fed's 2 percent annual target, Bernanke has taken up the other challenge. He noted last month that the country's persistently high levels of unemployment not only cause "enormous suffering and waste of human talent" but also could "wreak structural damage on our economy that could last for many years."
To try to get the sluggish housing sector moving, the Fed will buy $40 billion in mortgage debt per month until hiring picks up. Suggestions by economists are that the Fed is looking for a sustained unemployment rate of about 7 percent. These bond purchases should lower mortgage rates even further, encouraging more housing starts — meaning jobs — and mortgage refinancings that could give consumers additional discretionary income. The Fed also indicated that it would extend near-zero short-term interest rates through mid 2015, about half a year longer than previous statements, to provide longer-term certainty that cheap borrowing will remain available and hopefully boost employment.
Predictably, Bernanke's plan got a thumbs down from Republican politicians who have been infuriated by the Fed's efforts on the employment front and its purchases of more than $2 trillion in securities in the first two rounds of quantitative easing. Republican presidential nominee Mitt Romney's campaign predicted the Fed's move will be "ineffectual." But absent a functional Congress that could directly create jobs through infrastructure and other stimulus investments, Bernanke's decision is the right one and the only one at the moment.