Fed is as paralyzed as Congress is

The U.S. economy is slumping, and the word Tuesday from the Federal Reserve is that the central bank is just as paralyzed as Congress is.

The most remarkable thing about the policy statement from the Fed was the wide gulf between the Fed’s diagnosis of what’s ailing the economy and the Fed’s prescribed medicine. Read the full story: Fed says low rates to stay through at least mid-2013.

The economy is in much worse shape than we thought, the Fed said. And we won’t — or can’t — lift a finger to do anything about it.

Up until now, the Fed had been clinging to a hope that the softening in the economy would prove to be transitory, that temporary factors — such as high energy prices and the supply shock of the Japanese earthquake — were to blame.

No longer.

The Fed has come to grips with the reality: If temporary factors “account for only some of the recent weakness in economic activity,” then it follows that permanent, structural or fundamental factors must account for most of our problems. And those problems will take years to resolve.

Sure, the Fed made some news by saying that it would likely keep interest rates exceptionally low until the middle of 2013. Never before has the Fed put a date-certain stamp on any of its actions. That sounds like a pretty dramatic announcement, but actually it was a statement of impotence. Read the full text of the Fed statement.

The promise to keep interest rates near zero for two more years will do very little to stimulate the economy in the near term. On the margin, the Fed’s promise will help cement market expectations that the Fed won’t be tightening monetary policy any time soon. Everyone already expected the Fed to sit tight for a long time, so what does it really achieve?

The mid-2013 promise falls well short of the market’s hopes, but it was as far as Federal Reserve Chairman Ben Bernanke could push his committee. Three of the 10 members of the Federal Open Market Committee dissented, which by central-banking standards is practically a mutiny. Read blog post on the Tell: Three dissents among Fed officials akin to ‘mutiny’?

The three dissents tell us that the Fed won’t implement a new round of bond buying — not unless the situation gets a lot worse. The remaining arrows in Bernanke’s quiver will stay right there, unused.

And the economy — and the market — must fend for itself.

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