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The Fed In 3 Phrases: Decoding Bernanke And Co.

Many economists are predicting Federal Reserve Chairman Ben Bernanke and his fellow policymakers will continue to depress long-term rates.
Alex Brandon
Many economists are predicting Federal Reserve Chairman Ben Bernanke and his fellow policymakers will continue to depress long-term rates.

The Federal Reserve — the nation's central bank — will end its two-day meeting on Wednesday by offering its assessment of the economy, and then declaring its latest plan for making things better.


Investors all over the world will be waiting to hear just how weak — or not — the Fed thinks the U.S. economy is. And they will be watching to see whether the bankers plan to continue trying to stimulate growth by extending two controversial programs, one known as Operation Twist, and the other as quantitative easing.

Some economists believe those programs have encouraged lending and held down interest rates firmly enough to prop up the economy during an unusually hard time. But others say the Fed already has gone too far in pushing down rates while infusing money into the banking system. They argue that Fed actions are too aggressive and will set the stage for a surge of inflation in the not-distant future.

Many economists are predicting Fed policymakers will continue intervening to depress long-term rates rather than reversing course. That's because a new economic slowdown may be taking hold, especially one tied to the financial crisis in Europe, according to these experts.

"The Fed will show its concern that the economy continues to underperform," said Paul Edelstein, U.S. economist for IHS Global Insight, a forecasting firm. While he does not expect the Fed to unveil any dramatic new programs, he does assume it will extend current efforts "aimed at pressing down on long-term yields."

Unfortunately, understanding exactly what the Fed is planning is never easy. The bankers often speak a language the rest of us have never heard. Today at 2:15 EDT, Fed Chairman Ben Bernanke will hold a press conference to try to better explain what the bankers are trying to do.

To follow along better, listeners should be familiar with three key terms: monetary policy, Operation Twist and QE3. Here are the definitions and pronunciations so that you can practice using the terms in conversations, should you find yourself sitting next to an economist.

Monetary Policy \ MAH-nih-tair-ee POL-uh-see \

The economy is greatly influenced by two sets of policies, one dealing with fiscal issues and the other with monetary matters. Fiscal policy involves government taxes and spending — and it's set by Congress. Monetary policy involves money and the banking system, and it's set by the Fed.

Once Fed officials determine what their monetary policy ought to be, they implement it by manipulating the amount of money in the banking system. The steps they take set the direction for interest rates, which in turn can influence inflation and employment levels.

Under Bernanke's leadership, the current policymakers have said they want U.S. inflation to run at about 2 percent a year. At the same time, they want interest rates to be pushed down and held steady at low levels to help businesses expand and consumers to buy homes and cars.

Critics say that when the Fed acts too aggressively to boost lending — either by squeezing down interest rates or expanding the supply of money — it sets the stage for a big burst of inflation. Also, many retirees are discouraged by the extremely low interest rates they have been getting on their savings. A recent Wells Fargo/Gallup poll found that 1 in 3 investors says low rates have forced him to delay retirement.

But Fed supporters say low-interest-rate efforts have allowed the economy to dodge a full-blown depression, while helping ensure that U.S. banks are among the world's strongest.

To make its monetary-policy decisions, the Fed holds eight scheduled meetings a year. Typically, the gatherings last two days and conclude with an announcement about any policy changes. The central bank's overarching goal is to keep the U.S. economy growing at a steady, sustainable pace with low inflation and robust job creation.

Operation Twist \ op-uh-RAY-shuhn twist \

Fed policymakers are worried the U.S. economy is still failing to create enough jobs. They especially would like to see the housing market strengthen and construction employment perk up. To help with that, they have been trying to keep interest rates low so that more homebuyers could qualify for mortgages.

Last fall, the Fed set out to push down on mortgage rates by launching "Operation Twist," a strategy wherein the Fed would sell $400 billion worth of its own shorter-term bonds — and use those proceeds to purchase longer-term bonds. That's a twist that helps screw down long-term rates, such as those on mortgages. Economists expect the Fed to extend the expiring "operation," and keep "twistin' the night away."

QE3 \ q-ee three \

This term refers to a Fed strategy that effectively adds money to the economy and encourages lending.

The Q stands for "quantitative"; the E stands for "easing" (pumping more cash into the banking system). And the 3 may stand for "Hail Mary," because the Fed has already tried this quantitative easing strategy twice.

The central bank's goal is to encourage lending. If businesses could borrow more, they could afford to hire workers and buy new equipment. To get more cash moving through the economy, the Fed injects a predetermined "quantity" of money into banks. When banks have an expanded pool of cash available, they can send it back out in the form of loans.

Critics say banks have failed to boost their lending as much as they should have, given the extraordinary help from the Fed.

Copyright 2021 NPR. To see more, visit https://www.npr.org.

Marilyn Geewax is a contributor to NPR.