The Fed is charged by Congress with a twin mandate of maintaining maximum employment and stable prices, and it is failing on both counts. The economy isn't in free fall. But as new data on gross domestic product affirmed Friday, the economy is mired in mediocre growth, too slow to bring down the unemployment rate. Inflation, meanwhile, is running about 1 percent, below the rate Fed officials view as optimal. When inflation is a little higher, it encourages consumers and businesses to spend money before it loses value. "Viewed through the lens of the Federal Reserve's dual mandate . . . the current situation is wholly unsatisfactory," William C. Dudley, the New York Fed president, said in a speech early last month. When Bernanke was confirmed this year for a second four-year term, the widespread assumption was that his major task would be to decide when and how to move away from the unconventional measures taken during the crisis to boost growth. In reducing its target for short-term interest rates to zero, the Fed had exhausted its normal tool for managing the economy. So the central bank pumped money into the economy by buying vast quantities of bonds - more than $1.7 trillion worth. Now the Bernanke Fed is poised, if not to double down on that earlier bet, at least to up its wager. "Phase one was to avoid a complete market meltdown and something akin to the Great Depression," said Mark Gertler, a New York University economist who has collaborated with Bernanke on academic research. "Phase two begins now and is in some ways trickier. . . . Once again we're in a situation where we have to use policies we haven't really experimented with." The Fed is seeking to avoid the fate of Japan, where falling prices and weak economic growth over the past two decades have created a self-reinforcing economic stagnation. The hope is that by moving aggressively, such a cycle can be averted. Fed watchers expect that the two days of meetings around a giant mahogany table will culminate this week in the announcement of around $500 billion in
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2010 Media Report Villanova School of Business