If the Federal Reserve had a manual, the current chapter might be called "Giving it the old college try."
More than four years after the worst financial crisis since the Great Depression, the economy is still limping along, companies are reluctant to hire and the unemployed are so discouraged that millions have given up looking for jobs. So the Federal Reserve announced Thursday it is trying yet another round of economic stimulus without any certainty it will bring people back to work.
In essence, Chairman Ben Bernanke said the Fed doesn't have the ability to provide all the fixes the economy needs, but he's using what he has to try to get companies to hire more. What he can do is try to influence interest rates, the stock market and confidence.
He's trying to make it cheaper for companies to borrow money and for individuals to buy or refinance homes so both groups will spend more. If spending picks up, the thinking goes, companies will need to hire so they can produce and sell more.
The central bank said it would begin buying billions of dollars of mortgage-backed securities, its best shot at pushing down mortgage rates. To prove the Fed's commitment, it left the program open-ended and said it was prepared to do even more "if the outlook for the labor market does not improve substantially."
In a dramatic acknowledgment of the depths of the problems, the Fed said it would try to keep interest rates at their current near-zero level until at least mid-2015. That pushes back the commitment from late 2014.
But Bernanke said the new action "is no panacea," and analysts are skeptical that it will accomplish little more than give a bump to the stock market, which typically spikes on dramatic Fed pronouncements. The Dow Jones industrial average climbed 206.51 points on the Fed's news and is up almost 11 percent this year, but that gain will disappear quickly if the economy fails to gain traction.
Bernanke thinks the Fed's planned actions will help. But he notes that economists, and Fed governors too, disagree on how much.
The job market is being affected by several factors that tend to be outside the Fed's control, Bernanke noted: the European recession, which curtails spending on U.S. products; cuts and layoffs coming in state and local governments; and a continued lack of lending from banks. In other words, while people with strong credit scores can borrow, those hit by the housing crisis and layoffs can't refinance homes or borrow to buy them.
Also looming over business confidence is a threat to the economy from political leadership. At the end of this year, hundreds of billions of dollars in tax increases and spending cuts are scheduled to occur. And if Congress is paralyzed and lets them happen, Bernanke assumes the economy will go into recession.
Analysts call this going over "the fiscal cliff." Bernanke said he thinks politicians will intervene before it's too late. But if not, he admits the Fed's tools won't be powerful enough to fight the recession.
The Fed has a mandate to try to stimulate an environment that provides adequate levels of jobs. And he said the focus on mortgage bonds is intended to cause mortgage rates to dip lower, though 30-year loans already are close to 3 percent.
"One of the missing pistons in the engine" is housing, Bernanke told reporters. "Usually, a big part of recoveries" involves homebuying and home construction and "we haven't had that."
Observers are skeptical that lower mortgage rates will help boost the housing market.
"Mortgages have gone from 7 percent to 3 percent and they still haven't gotten housing moving," said James Bianco of Bianco Research. "So I doubt that if they go to 2 percent that will do it either."
And the Fed is doing nothing to address the fact that about a third of Americans cannot get loans because their homes have plunged in value, or they've faced foreclosure or job losses, Bianco said. On the other hand, if mortgages plunge sharply, maybe borrowers who only qualify for high interest loans will get lower interest rates. If they can refinance homes, that will give them more spending money per month.
Bianco is also skeptical of what's known as the stock market "wealth effect," or people looking at their 401(k)s going up in value and then responding by spending money.
That's because there may be no more wealth effect. The Standard & Poor's 500 has climbed 16 percent this year, but it's still off its 2007 high. So rather than feeling newly rich, "investors feel like there's been a reduction in (their losses) and you don't spend loss reduction."
Yet former Federal Reserve Governor Randall Kroszner, of the University of Chicago Booth School of Business, gives the Fed credit for trying to give business owners and executives confidence that they can count on the Fed for a long time. And that may prod them to invest in their businesses.
He notes that the Fed provided unusual assurances that it would continue to keep interest rates low — even after the recovery has begun. They are saying, according to Kroszner, "Don't worry about us pulling the rug out from under the recovery."