Fed mixes it up and comes up with the worst of all worlds

Ben Bernanke, chairman of the US Federal Reserve, was able to deliver something to turmoil wracked markets; he promised to keep the fed funds rate close to zero until mid-2013, the first time, as far as I am aware, that the Fed has ever pledged to hold rates for such a long, and specific, length of time.

To commit to hold rates at virtually zero for nearly two years is unprecedented, and a mark of just how concerned policymakers have become at the economy’s inability to lift itself out of its funk. It provides markets and business with a degree of certainty on rates that they’ve never had before, and may therefore lift confidence.

But was it enough? The fact that three members of the open markets committee (FOMC) dissented from this promise maintains a strong, hawkish voice on the FOMC that undoubtedly remains fiercely opposed to any further quantitative easing. QE3 was the only thing that would comprehensively have reversed the current market rout, but Mr Bernanke cannot, for the moment at least, deliver it. Undue caution from the Fed combined with continued political paralysis on Capitol Hill does not make for a happy economy.

What committing to two years of zero interest rate policy will certainly do, on the other hand, is further weaken the dollar. Does the Fed know something the rest of us don’t to have taken such an aggressive position on rates. And what does it do if inflation returns? The Chinese, with inflation already at 6.5pc, will be spitting tacks. The Fed has mixed it up and come to a messy compromise which is neither one thing or the other. This was not what we hoped for.