Across America today, the question on everybody's lips is: WWBBD? What will Ben Bernanke do?

Ben Bernanke Ben Bernanke (J. Scott Applewhite/AP)

Okay, perhaps that's not the question on everybody's lips. But it should be. There are basically two institutions that set U.S. economic policy. One is the Congress, and they've chosen to take themselves out of the game even as the recovery deteriorates here at home and storm clouds mass internationally. The other is the Federal Reserve. And they're very much not out of the game.

The expectation is that Fed policy will remain largely unchanged after today's meeting. But let's say they wanted to change it. What would that look like?

"Fortunately," writes the Economist's Greg Ip, "we don’t have to speculate. Janet Yellen, the Fed’s vice-chairman, described one in detail in speeches in April and in June. Ms Yellen uses a fairly conventional monetary policy rule in which the Fed seeks to minimize variations in inflation around its 2% target and in unemployment around its natural rate of 5.5%. In her simulation the Fed, by putting equal weight on its employment and inflation objectives, eases monetary policy more aggressively, keeping the federal funds rate at zero through the end of 2015 (instead of 2014 as currently projected). The result is a much more rapid decline in unemployment. Inflation briefly tops 2%, before returning to 2% over the long term."

Yellen -- the Fed's #2 policymaker -- isn't alone on this. "Charlie Evans, the Chicago Fed president, has his own version: commit to getting unemployment below 7% provided inflation does not exceed 3%," continues Ip. But "unlike Mr Evans, Ms Yellen is part of the Fed’s inner circle and has considerable input into Mr Bernanke’s decision. Which raises a question: if Ms Yellen has a plan that uses the Fed’s new framework to reduce unemployment more rapidly, why hasn’t the Fed adopted it?"

One other thing: As Jan Hatzius of Goldman Sachs writes, "it is important to note that a decision not to ease is tantamount to a tightening. The reason is that the impact of unconventional easing--unlike that of conventional short-term interest rate policy--'decays' over time." That is to say, doing the same thing becomes less effective, which means doing the same thing for a long time means doing less over time. Moreover, Hatzius says later in his piece, the market is clearly expecting some kind of easing, so if the Fed were to disappoint, "so financial conditions would likely tighten if the Fed did nothing."

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Top story: The return of the Fed

The Fed makes its next move today. "Federal Reserve policy makers, meeting amid growing concerns about the U.S. recovery and the European debt crisis, have an array of options if they decide the economy needs an added boost. Fed officials, concluding a two-day policy meeting Wednesday, could extend a program known as 'Operation Twist,' in which the central bank sells short-term Treasury bills and notes and plows the proceeds into longer-term securities. They also could decide to shift the proceeds into mortgage- backed securities rather than long-term Treasury bonds. Among other choices: launching a new round of bond-buying, known to some as quantitative easing, to expand the central bank's portfolio of assets. Or they could alter the way they describe their plans for interest rates with an assurance that short-term interest rates will stay near zero beyond 2014. Policy makers also could stand pat but offer assurance that they stand ready to act if the economy gets weaker." Kristina Peterson in The Wall Street Journal.

Why Fed may do more stimulus, in one chart:

Expect them to extend 'Operation Twist'. "By renewing 'Operation Twist,' as the program is called, the Fed would be able to show investors that the central bank is not pulling back from its years-long campaign to support economic growth. Yet it would also give the Fed time to consider whether more action is necessary, as the U.S. economy faces perils at home and abroad...More aggressive actions could include a firm commitment to keeping interest rates ultra-low through 2014 or longer -- though the Fed only says it expects to do so through 2014 -- or even a third round of buying Treasury bonds and mortgage securities." Zachary Goldfarb in The Washington Post.

But that might not do much for the economy. "Extending Operation Twist is an attractive option for the Federal Reserve at its policy meeting that begins Tuesday because the program is relatively uncontroversial. That’s in part because its impact is limited-and its effects would likely only become more muted if the central bank attempts to string it out...Unlike starting another major bond-buying program, extending Operation Twist doesn’t significantly change the size of the Fed’s portfolio of assets and isn’t expected to nudge inflation up or down much...A second round of Operation Twist is likely to be smaller than the first, since the Fed likely would have only about $240 billion of short-term Treasurys left to sell, said Michael Feroli, chief U.S. economist at J.P. Morgan Chase & Co. For example, a $150 billion extension of Operation Twist over several months might lower longer-term interest rates by about five to 10 basis points, which in turn might increase gross domestic product growth over the next two years by about 0.1% per year, he said." Kristina Peterson in The Wall Street Journal.

Operation Twist, explained:

Stocks rose on expectations of further stimulus. "Speculation that U.S. central bankers are set to unveil additional stimulus measures lifted the Standard & Poor's 500-stock index for the fourth session in a row, as tensions eased across Europe's financial markets. The S&P 500 rose 13.20 points, or 1%, to 1357.98 on Tuesday, giving the benchmark its longest winning streak since May...The Federal Reserve's policy-setting committee convened a two-day meeting on Tuesday. with a series of statements and forecasts scheduled to begin at around midday on Wednesday. Tuesday's rally was based 'generally on enthusiasm for, and hope that, the Fed might say something market friendly tomorrow,' said Steve Sosnick, equity risk manager for Timber Hill. Investors will be watching closely for hints that the central bank is prepared to intervene again in the U.S. economy, perhaps through additional purchases of government securities, or a variation of an existing program set up to extend maturities of the central bank's bond holdings." Chris Dieterich in The Wall Street Journal.

But markets are likely to be disappointed no matter what happens. "No matter what the Fed does, some corner of the financial markets will be unhappy Wednesday afternoon. In the last several weeks, as Europe’s sovereign crisis flared and U.S. economic news simultaneously worsened, the expectations on Wall Street have gone from no new Fed easing to the Fed potentially launching a new extraordinary, quantitative easing program at the end of its two-day meeting Wednesday...Treasurys were also reacting in part to the recent sell off in German bunds, resulting in a five-week high yield, as traders see the euro zone successful in buying more time towards a solution. The bond sell off, along with weaker mortgage prices, was also seen as a move by some investors to take off some bets on Fed easing, in case Operation Twist or QE does not materialize." Patti Domm in CNBC.

Here's what the top Wall Street economists are predicting:

IP: The Fed is ignoring its inflation target. "Lost in this blizzard of outside advice is the fact that the Fed actually has a new framework of its own. In January it declared that henceforth its long-run target for inflation was 2%. Previously Fed members only stated their long-run preference, which ranged from 1.5% to 2%. It also said it considered its two statutory goals, low inflation and full employment, equally important. Previously, employment was, de facto, subordinate to inflation. If you haven't heard more about this, it's because the Fed has treated the target like an unwanted Christmas gift, still unopened months after the tree has been taken down...Indeed, the Fed acts as if nothing has changed. Its 'appropriate' monetary policy in April yielded forecast inflation of 2% or lower over the next few years. This vindicates critics who say the Fed acts as if 2% is a ceiling, not a target." Greg Ip in The Economist.

@JustinWolfers: Wondering if the FOMC spent time today discussing the difference between an inflation target and an inflation ceiling.

SALMON: We need fiscal, not monetary, stimulus. "The Fed might be able to push long-term interest rates down, but as any fixed-income professional knows, there’s a huge difference between rates and credit. And something worrying is clearly happening in the mortgage market: rates are low, but credit is very, very hard to come by...It seems we don’t need Ben Bernanke any more, we need Super Mario to come in and unclog those pipes. It’s a hugely important job, but the problem is that no one knows how to do it, especially insofar as the clogs look like rational market pricing more than crisis-related market inefficiency. (Remember, the prepayable fixed-rate 30-year mortgage itself is something which is never found in a laissez-faire capitalist system: only government intervention can ever persuade banks to issue such things.) All of which helps underscore my belief that we’ve more or less reached the limits of what the Fed can do. In order to get this economy back on track, what we need is fiscal, not monetary, stimulus. Don’t hold your breath." Felix Salmon in Reuters.

BAKER: The Fed should target a longer-term rate. "The Fed should be prepared to take additional steps to boost the economy. There are two routes the Fed can go. First, it could do yet another round of quantitative easing. This amounts to buying up more long-term debt, either treasury bonds or mortgage-backed securities, with the hope of driving down long-term rates further...The alternative route would be to pick up an idea that Bernanke tossed out three years ago. He could target a longer-term rate. For example, he could announce that he would set a target of 1.2% for 10-year treasury bonds for the next year (compared to around 1.5% at present). This would mean that the Fed would buy as many Treasury bonds as necessary to bring yields down to this level. This would have a similar, but likely, somewhat more powerful effect as another round of quantitative easing. In an optimistic scenario, it could lower 30-year mortgage rates by 20-30 basis points, allowing for a rather greater impact on mortgage refinancing and investment." Dean Baker in The Guardian.

SUMNER: The Fed's tight monetary policy is reckless. "Today I’m going against conventional wisdom by arguing that the Fed’s ultra-tight monetary policy has dramatically increased risk in three areas: policy fragility, balance sheet risk, and financial system fragility...The Fed has adopted an extremely reckless and risky policy. But here’s the great irony; 99% of economists think that solving the problem, going back to faster NGDP growth, would be a risky decision for the Fed. 'Oh dear . . . they might have to buy so much stuff.' It’s all about fear of the unknown. I’m here to tell you that 5% NGDP growth is the known. What we have today is the unknown. This applies doubly to Europe. Remember those who said the euro would bring ‘stability,' that it would eliminate the instability of exchange rate fluctuations?...The Europeans have picked up the whole country of Greece and are shaking it back and forth. The result is an economic/social/political earthquake. The real risk is not doing too much with monetary policy, it’s doing too little." Scott Sumner in The Money Illusion.

DUY: QE3 seems unlikely. "Goldman is expecting a new round of QE, largely on the expectation that the Fed will significantly mark down its economic forecast as well as feel a need to respond to the European crisis (in effect, doing the job the ECB has abdicated)...While I would greatly welcome open-ended QE, it seems like a pretty big leap for a central bank that just a few weeks ago was expected to hold policy constant. Moreover, I am hard-pressed to say that economic or financial conditions have deteriorated such that the Fed would shift gears so quickly. This doesn't feel like 2008. I am not even sure it feels like last fall when the Fed embarked on Operation Twist. That said, the Fed might suspect, or know, that Europe is going down the tubes on the back of some let's just say some questionable economic policy making. Better to get ahead of that curve. Well ahead." Tim Duy in Fed Watch.

@ObsoleteDogma: I don't see the Fed doing more than extending Twist and its forward guidance to early 2015. QE3 seems a bit off.

Top op-eds

1) DAVIDSON: We pay too much attention to the jobs report. "The jobs number, which only the most die-hard econonerds (including me) used to care about, is supposed to tell us how the economy is doing. Now, though, it is doing something much more complicated. The report on past job performance has morphed into a driver of future job performance, essentially mucking up the thing it’s measuring...Economic growth is, in part, driven by people and businesses feeling optimistic about the future. And after hearing how lousy the job sector looked over the last month, some consumers decide not to buy things, like a new house or even an extra appetizer. After hearing that so many of their customers are out of work, some companies decide there isn’t enough growth on the horizon to warrant hiring. Just like that, a bad initial jobs report (obsessed over by a frantic news media) might make a bad situation worse. It sounds simplistic, but much economic policy -- from austerity to stimulus -- comes down to attempts at mass psychotherapy." Adam Davidson in The New York Times.

2) ORSZAG: Voting should be mandatory. "It’s very likely no U.S. president has ever been elected by a majority of American adults. It’s our own fault -- because voter participation rates are running below 60 percent, a candidate would have to win 85 percent or more of the vote to be elected by a majority. Compulsory voting, as exists in Australia and more than two dozen other countries, would fix that problem...Mandating voting has a clear effect: It raises participation rates. Before Australia adopted compulsory voting in 1924, for example, it had turnout rates similar to those of the U.S. After voting became mandatory, participation immediately jumped from 59 percent in the election of 1922 to 91 percent in the election of 1925...This brings us to the paradox of compulsory voting: It’s a sensible idea that could be enacted only when it would have almost no effect. In that case, some might wonder, why do it? The answer is that increased participation would make our democracy work better, in the sense of being more reflective of the population at large." Peter Orszag in Bloomberg.

3) PORTER: The mandate might not matter as much as thought. "Advocates of heath care reform argue that eliminating the mandate could gut the president’s plan. Most health economists would probably agree. But this consensus is based on a fairly optimistic view that the individual mandate and accompanying fines for failing to comply will be highly effective at persuading Americans to buy health insurance that they would otherwise forgo. On that score, the mandate might matter less than its advocates believe...Advocates of health reform argue that the individual mandate will create a social norm that will hold everything together. Without it, people merely have a subsidy to induce them to buy insurance. The mandate turns buying health insurance into the rule of the land, like paying taxes...And yet Mr. Starr of Princeton has a point: for social norms to work, they probably need to be perceived as legitimate." Eduardo Porter in The New York Times.

4) BUCHHOLTZ: Let's lock in low rates. "America has long been the land of the game show. And at some point just about all of us have screamed at a contestant: 'Don't be stupid--take the money!' That's what American citizens should be screaming at the United States Treasury today. The government has racked up $5 trillion of debt since President Obama moved into the White House. We don't know how we're going to pay it back. Yet the world is willing to lend us 10-year money at rates substantially below 2%. So why not give our kids a break by issuing 50- or 100-year bonds, locking in today's puny rates?...Issuing 100-year bonds, or at least 50-year bonds, would require a higher interest rate, perhaps 3%. Sure, that would put more pressure on near-term deficit reports. But leaders should be willing to let their personal image take a dent if it clearly helps the American people. Locking in 100 years of borrowing at a 3% rate would be the best deal since Pope Julius paid a pittance to have Michelangelo paint his tomb." Todd Buchholtz in The Wall Street Journal.

5) THOMA: The Republican shift on the role of government hurts the U.S.. "Traditionally, those who take a more hands off approach do not deny that all markets fail to some degree - no market is perfectly competitive. But for the most part they do not see these failures as having large consequences, and even when they do, government intervention is rarely the solution. In many, if not most cases, that just makes things worse. In the modern Republican Party, these views have been taken to the extreme so that government is rarely, if ever, supported...This extremism within the Republican Party is hurting the economy. In the short-run, it makes it much harder to do anything about the recession. Even if you believe spending more on infrastructure will do nothing to help employment, letting infrastructure crumble will hurt our long-run growth, and presently the construction of infrastructure is about as cheap as it gets." Mark Thoma in The Fiscal Times.

70s cover interlude: Fiona Apple and The Roots play Paul McCartney & Wings' "Let Me Roll It" live on Late Night with Jimmy Fallon.

Got tips, additions, or comments? E-mail me.

Still to come:Housing starts fall; more are on their parents' healthcare; charter schools enroll fewer disabled students; the farm bill makes it through day one; and slinkies are neat.


Debt markets are ignoring credit rating cuts. "After Moody’s Investors Service issued a 'negative' outlook for U.K. debt on Feb. 13, yields on government securities relative to benchmark U.S. Treasury debt fell over the next month, instead of rising...It’s not just Britain. After Standard & Poor’s stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose. For investors and policy makers, predicting the consequences of a rating change by S&P or Moody’s -- the dominant issuers of debt scores -- may be little different from flipping a coin. Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P." John Detrixhe, Zeke Faux and Katie Linsell in Bloomberg.

Greece's bailout is likely to be renegotiated. "Greece’s €174bn bailout programme has slipped behind its targets during the months of political brinkmanship in Athens, requiring international lenders to open negotiations with the incoming Greek government to get it back on track, according to a senior EU official involved in the talks. While the targets and deadlines of the bailout plan are likely to be maintained amid continued resistance in Berlin and other northern eurozone capitals to easing the rescue’s terms, the EU official said that Athens would have to find new ways to hit those targets...Angela Merkel, speaking on Monday at the G20 in Mexico, insisted that there could be no change to the programme of spending cuts and concomitant deficit reduction. The issue is so sensitive that Amadeu Altafaj-Tardio, the economic spokesman for the European Commission, denied that a new memorandum would be negotiated with Greece less than an hour after the EU official briefed reporters." Peter Spiegel and Ben Fenton in The Financial Times.

Local governments are driving public sector layoffs. "Fourteen states plan to resolve their budget gaps by reducing aid to local governments, according to a report by the National Governors Association and the National Association of State Budget Officers. So while the federal government has grown a little since the recession, and many states have recently begun to add a few jobs, local governments are making new cuts that outweigh those gains. More than a quarter of municipal governments are planning layoffs this year, according to a survey by the Center for State and Local Government Excellence. They are being squeezed not only by declining federal and state support, but by their devastated property tax base." Shaila Dwan and Motoko Rich in The New York Times.

The House GOP tax reform would boost taxes on the middle class. "The tax reform plan that House Republicans have advanced would sharply cut taxes for the wealthiest Americans and could leave middle-class households facing much larger tax bills, according to a new analysis set to be released Wednesday. The report, prepared by Senate Democrats and reviewed by nonpartisan tax experts, marks the first attempt to quantify the trade-offs inherent in the GOP tax package, which would replace the current tax structure with two brackets -- 25 percent and 10 percent -- and cut the top rate from 35 percent...Although households earning $100,000 to $200,000 a year would save about $7,000 from the lower tax rates in the GOP plan, those savings would be swamped by eliminating major deductions, according to the report by the Democratically controlled congressional Joint Economic Committee. The net result: Married couples in that income range would pay an additional $2,700 annually to the Internal Revenue Service." Lori Montgomery in The Washington Post.

More Senate Democrats may back a temporary extension of the Bush tax cuts. "A growing number of Senate Democrats are signaling they are not prepared to raise taxes on anyone in the weak economy unless Congress approves a grand bargain to reduce the deficit. At least seven Democratic senators have declined to rule out supporting a temporary extension of the Bush-era income tax rates...That gives Senate Republicans a chance to push a temporary extension similar to the deal Minority Leader Mitch McConnell (R-Ky.) struck with President Obama in December of 2010. Democrats running for reelection, such as Sens. Jon Tester (D-Mont.) and Joe Manchin (D-W.Va.), have declined to endorse their leadership’s call for a tax increase on wealthy families. Instead, they want Congress to pass a broad package that would cut spending and reform the tax code, which they argue would inject new confidence into the private sector." Alexander Bolton in The Hill.

Jamie Dimon faced the House. "J.P. Morgan Chase & Co. Chief Executive James Dimon sparred with lawmakers of both parties as an appearance in the U.S. House of Representatives proved more contentious than his Senate hearing last week. Mr. Dimon faced pointed questions about the bank's lobbying on derivatives rules, risk models and on whether the bank is so large and complex that it would have to be rescued by the government if it were to fail. Several lawmakers accused Mr. Dimon of being more focused on trading activities than on lending to consumers...Earlier in the day, bank regulators said a lack of disclosure by J.P. Morgan regarding risks it was taking hampered efforts to prevent the trading losses of more than $2 billion the bank disclosed last month. Comptroller of the Currency Thomas Curry on Tuesday told the hearing that the regulator is probing the level of reporting provided by J.P. Morgan's Chief Investment Office, the unit responsible for the losses." Alan Zibel and Jessica Holzer in The Wall Street Journal.

@damianpaletta: Dimon says only way JPM loses half a trillion dollars is if the earth "is hit by a moon."

Slow motion interlude: Slinkies are just awesome.

Health Care

The White House is preparing to move forward with whatever survives the healthcare ruling. "White House officials say they are confident the Supreme Court will uphold the health-care law, but they also are preparing for a range of outcomes, including pressing ahead with what remains of the law if the court strikes down only part of it. Republicans, meanwhile, are preparing a two-step approach if the court doesn't void the entire law: A quick vote in the House to repeal any parts of it that remain, which would be unlikely to get approval in the Democrat-controlled Senate, and then a push for a series of small changes to health-care policy...White House officials have been fearful that any talk of contingency planning would send a message to the justices that there are alternatives if the court peels back the law. But senior officials have been talking through multiple scenarios in preparation for the court's ruling, Democrats said." Laura Meckler and Louise Radnofsky in The Wall Street Journal.

More than three million have stayed on their parents' healthcare. "More than 3 million young adults have been able to stay on their parents' insurance plans because of President Obama's healthcare law, the Health and Human Services Department said Tuesday. The healthcare law allows children to stay on their parents' plans through age 26. HHS touted that popular benefit Tuesday amid deep uncertainty about the fate of the health law and questions about which parts Republicans would try to preserve...Roughly 3.1 million people between 19 and 25 now have insurance because of the Affordable Care Act, HHS said Tuesday. About 75 percent of that age group is insured, up from 64 percent before the under-26 provision took effect. Many Republicans list the under-26 provision as one piece of the ACA they would likely reinstate...Three large insurance companies said last week they would voluntarily keep covering dependents through age 26 if the federal requirement is struck down." Sam Baker in The Hill.

Domestic Policy

Charter schools continue to enroll fewer disabled students. "Charter schools in most states continue to enroll proportionately fewer students with disabilities than traditional public schools, a new government report shows. Across the country, disabled students represented 8.2 percent of all students enrolled during the 2009-10 year in charter schools, compared with 11.2 percent of students attending traditional public schools, according to a Government Accountability Office analysis of Department of Education data...The report’s authors posited several possible reasons for the overall disparity. Some parents choose public schools that have more established programs for students with disabilities, while some charter schools do not have the resources or teaching staff to support individual students’ needs. But in some cases, the report said, school administrators tacitly discriminate by discouraging students with disabilities from enrolling." Motoko Rich in The New York Times.

Visualization interlude: PBS’s America Revealed's visualization of NYC pizza delivery routes.


The farm bill survived its first day of votes. "With a blueprint in hand, the Senate began grinding out votes on its farm bill Tuesday, moving quickly from catfish inspections and wind loans to a classic 'black hat-white hat' showdown at dusk between crop insurance companies and food stamp advocates. The industry, which faces more severe challenges Wednesday, escaped intact, helped by the fact that senators are also angry with states for taking advantage of Washington’s rules and leveraging token amounts of federal home heating aid to gain more in food stamps. Indeed, a $1 or $5 annual heating payment can become a ticket for hundreds more in food stamp benefits. And the cost to Washington is approaching $1 billion a year with at least a dozen states practicing some variation of the 'heat and eat' policy. The farm bill seeks to stem this tide by tightening the rules to save an estimated $540 million a year. And on a 66-33 roll call, the Agriculture Committee leadership prevailed." David Rogers in Politico.

@AndrewRestuccia: Reid: "Everybody knows how they're going to vote" on farm bill. Debate could change minds, "but probably not."

Congressional leaders want a highway bill by the end of the month. "With the clock about to run out on federal highway funding, House Speaker John A. Boehner and Senate Majority Leader Harry M. Reid sent a message Tuesday to their members: Find a way to compromise. 'Senate Leader Harry Reid and Speaker John Boehner have told Chairman John Mica and me to finish our work this week on the transportation bill,' Sen. Barbara Boxer(D-Calif.) said after a Capital Hill meeting of the four leaders. 'I have asked Chairman Mica to meet continually over the next several days to achieve this deadline.' Without a conference committee deal by June 30, Congress will face extending funding levels set in 2005 yet again. An extension may force Congress to deal with an issue it has avoided for almost three years: how to pay for the nation’s long-term transportation needs. There have been nine extensions since the last long-term transportation bill expired in 2009." Ashley Halsey III in The Washington Post.

The White House threatened a veto of a GOP energy bill. "The White House is threatening to veto a broad House energy package that would mandate expanded onshore oil-and-gas leasing, limit environmental reviews of drilling projects and delay several Environmental Protection Agency air pollution rules. The threat to veto the GOP measure is no surprise, and the bill won’t advance in the Senate after its expected House passage this week anyway. But the threat's arrival a day after the White House similarly waved the veto pen at a Senate GOP plan to scuttle EPA power plant rules underscores deep political divides on energy and environmental policy...The formal White House 'statement of administration policy' also takes aim at provisions that would delay several air pollution regulations while an interagency panel reviews their cumulative effect on fuel prices, employment and the economy." Ben Geman in The Hill.

@WestWingReport: AAA data: gasoline prices have now fallen 44 cents a gallon (avg. price of regular nationwide), down 11.1% since Spring peak

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