Dollars and Sense: Pouring more liquor in the punch bowl

Bernanke speaks. The big news this week was the Federal Reserve announcement. It was big news for a couple of reasons. For one, any time the Fed meets, the markets pay attention. The policy-setting Federal Open Market Committee (FOMC) met on Tuesday and Wednesday. But this meeting was particularly significant because most observers thought the Fed would begin to taper its $85 billion monthly bond-buying scheme called Quantitative Easing. Two-thirds of economists polled by The Wall Street Journal thought Bernanke would announce a wind-down of Quantitative Easing.

Didn’t happen. Of course, he didn’t. At the close of the FOMC meeting on Wednesday, the Federal Reserve announced it would continue the bond-buying scheme. The stock markets seemed to like the announcement: The Dow and the S&P 500 hit record highs on Wednesday. But the most popular metaphor for describing what the FOMC did is this: They’ve kept the party alive by pouring more liquor in the punch bowl. That can’t end well.

Mediocre signs. It’s especially troubling when you consider that the underlying reason the Fed is continuing Quantitative Easing is the economy’s poor performance. Unemployment remains stubbornly high. This week, initial jobless claims rose 15,000 to 309,000. That is, if you can believe the number. For the second week in a row, processing delays have cast doubt on the numbers’ accuracy, significantly reducing their value as a guide to growth in the job market. The Fed trimmed its GDP growth estimate to 2 percent. That’s down from its prediction of 2.7 percent earlier in the year.

False prophets. What this means is that in addition to the economy not faring that well, we don’t even have a real solid sense of where it’s going. The Fed, in particular, has been consistently—some would say notoriously—optimistic in its forward-looking estimates. Sheila Bair, the former chairman of the Federal Deposit Insurance Corporation, now says openly that the Fed’s policies have prolonged the Great Recession. She’s not alone.

What’s in Ben’s brain? Bernanke will be leaving the chairmanship of the Fed at the end of January. Is he just trying to keep the stock market party going long enough for him to get out the door? Lots of people think the answer to that question is yes. I’m not as sure. I did a profile of Bernanke for WORLD a couple of months ago, and it just seems out of character for him to do that just to preserve his reputation. Bernanke is cautious and data-driven, and he’s perhaps the world’s leading expert on the Great Depression. His actions, most say, were successful in keeping the Great Recession of 2008 and 2009 from turning into a Depression, but they are too cautious to turn a stagnant economy into a robust economy, which is why today the economy is stuck in low gear.

The week ahead. House conservatives now appear to have the votes to pass a bill that links a rise in the debt ceiling to defunding Obamacare. Of course, the bill will never fly in the Senate, but the fact that it’s gotten this far suggests that conservatives in Congress are gaining strength. That could mean that the debt ceiling fight will be close, and it could go right up to the last minute, which is the end of September. With Syria cooling down, expect this issue to dominate the news in the weeks ahead. It will be a pretty steady week for economic news. We’ll get September’s consumer confidence report Tuesday. On Wednesday, we’ll get August new home sales, and on Thursday we’ll get the government’s revised estimate of second quarter GDP. All of these reports have the potential to move the markets, and they’ll certainly give us more data about how the overall economy is doing.

Listen to Warren Cole Smith talk about the economy on The World and Everything in It: