Too little too late? Depends who's asking. Late last week, the U.S. Federal Reserve Board finally launched another round of what it calls "credit easing" -- buying securities in the private market to improve the availability of credit -- and also committed to keep short-term interest rates low through mid-2015. Some people, especially certain presidential incumbents running for reelection, would have liked to see this happen earlier. But now the real question is whether it will matter at all.
The Fed committed to buy $40 billion a month in mortgage-backed securities issued by Fannie Mae and other government-backed enterprises, thus injecting a huge amount of new money into a long-term lending market. The hope is that long-term interest rates will fall as a result of the increase in the supply of money; it'll be easier for homeowners to refinance (giving them more cash) and for new buyers to get mortgages (creating more demand for housing).
Eventually -- it typically takes several months -- this cash injection is supposed to encourage companies to make new investments and hire more people. As a result, the Fed's action may only boost Barack Obama's chances of reelection through the spike in the stock market that followed the Fed's announcement. Of course, the people who own most of the nation's stocks don't spend every increase in their wealth, if they even live in the United States, so rising markets don't necessarily translate into higher consumption and new jobs.
Either way, the Fed's action will continue to depress the dollar against other currencies, and in the long run this may make the United States less dependent on foreign investors, help American exports, and create jobs. Even if American imports are affected by the exchange rate, a recovery here will still be good news for the global economy, as billions in income generated in the United States flow abroad. And if the Fed does manage to bolster employment, it will also transfer some wealth from savers to workers by lowering long-term interest rates in a bid to spur job creation today.
So why did the Fed wait to act until now? For months, its officials had been saying that the U.S. economy's growth was too slow but not slow enough to compel them to act. For one thing, they doubted the effectiveness of further easing because, quite simply, they didn't think companies had very good opportunities to invest. The uncertainty caused by political tribulations in Washington and the rolling snafu in the eurozone were probably holding back businesses more than interest rates, which were still at historic lows.
What changed? Some of that uncertainty finally went away. Two weeks ago, Mario Draghi, the president of the European Central Bank, declared that he would use extraordinary measures to support the euro if necessary, and -- perhaps because he was relatively new in the job and still had his credibility intact -- the markets believed him. Then, Mitt Romney reloaded his revolver and shot himself in the foot a few more times over his economic plans and foreign policy, leading even conservatives to say he had lost an election he didn't deserve to win, anyway. The chances that he and Paul Ryan -- who was unconcerned by the notion of the United States defaulting on its debt as chair of the House Budget Committee -- would win in November fell to about 30 percent in the prediction markets.