On Tuesday, the Federal Reserve reaffirmed its commitment to using unconventional efforts to stimulate the economy. In the latest Fed statement, the central bank said it would keep buying $40 billion in mortgage-backed debt per month to push interest rates lower. The Fed also repeated its vow to keep interest rates near zero until mid-2015. That may seem like the Fed is sending a signal to markets that it is intent on driving the economy no matter what the cost. But that may not be the case. According to former Fed governor Kevin Warsh, the move isn’t a show of strength — it’s something far more ominous.
“I think the Fed revealed in their actions just how grave they think the economy is,” he said on The Kudlow Report. The statement shows “just how concerned they are about the economy’s prospects; just how concerned they are about the ‘fiscal cliff’ and Europe.” Warsh served as a member of the Board of Governors of the Federal Reserve System from 2006 to 2011. From 2002 to 2006, he was special assistant to the president for economic policy, and executive secretary of the National Economic Council. His take on the Fed — as someone who was once on the inside — is that the central bank feels it’s the only institution standing between the nation and a terrible downturn.
He said, “The central bankers feel they’re doing it all by themselves; that they’re not getting help from Congress or the administration.” It seems Wall Street may share the skepticism expressed by Warsh. Again both the Dow and S&P closed lower.