Blame it on the Fed...

Because the Fed is simply not impotent at the zero lower bound.

There are a number of options the Fed now has, and market reactions, theory, and common sense all suggest that they can be effective. The Fed can cut the discount rate. When it raised the discount rate in 2010 -- for mysterious reasons since core inflation has remained below target for 3.5 years now -- the dollar rose and the stock market retreated, as theory suggests it should. The Fed can do more QE. Whenever the Fed has hinted recently at QE, the markets have responded in a big way, and when the Fed has tamped down the possibility of doing more, the markets have reacted negatively. The Fed can use language to be more explicit about the duration of the zero interest rate policy. When the Fed said it would keep rates low through the middle of 2012, 2 year government bond yields plummeted. And when QE has been announced anywhere -- the US, Japan, or Europe -- it has caused currency depreciation and lower yields on government bonds.

The Fed could also stop paying interest to banks on reserves (or go negative), it could target lower long-term rates, and it could promise to continue doing QE until core inflation hits 2%. Instead of doing domestic QE, the Fed could increase its holdings of foreign currency, or it could target state and local debt, to make it easier for local governments to borrow. In short, there is no reason to think that the Fed is "out of ammunition". Yes, more QE would tend to wind up in excess reserves, but it also pretty clearly changes prices. And prices matter.

Unfortunately, in private conversations, some of the members of the FOMC itself believe that the Fed is tapped out. (Actually, their beliefs are incoherent, as these officials conceded QE affects both bond yields and the dollar.) Prominent members of the administration also believe that the Fed can do little. This, probably more than anything else, explains the reluctance of the administration to fight for its Fed appointments.

The implication of a Fed that is quite clearly not tapped out is that the current state of the economy is the Fed's doing. As this blog made clear, monetary policy has been unnecessarily tight since the beginning of 2009, when the Fed inexplicably started contracting its balance sheet in the midst of the worst recession since the Great Depression. In 2010, it decided, prematurely, and despite nary a hint of inflation, to raise the discount rate. Then, when the economy faltered, it decided to postpone action until after the election. And now, once again, with the economy performing much worse than it had anticipated, with inflation still below target, with markets falling and with stimulus phase-out and state and local budget woes promising to subtract 3% of GDP growth the next 4 quarters, the Fed responds by effectively doing nothing.

Although no one's talking about it, the handling of your Fed appointments, and little else, might have been what sank your administration. Yet, there still is time. There are two FOMC seats open, and a third opens up in January. Make the most of these appointments, and you will beat Rick Perry. Continue to dawdle, or make more poor choices, and you are asking for a tough, tough reelection fight.