FORTUNE — Over the last few years, the Federal Reserve’s unprecedented monetary policies have conditioned financial markets to step in whenever the economy took a turn for the worse.
So with GDP barely growing during the first half of this year, it should come as no surprise to find all eyes on Fed Chairman Ben Bernanke. But when he spoke at the central bank’s annual symposium (fittingly dubbed, “econopalooza”) in Jackson Hole, Wyo., last month, Bernanke didn’t really say anything most of us didn’t already know: The economy is bad. We expect things to get better. But if things get worse, we have tools available to help.
And last week, just days after the Labor Department reported the economy created zero jobs in August, all eyes were on Bernanke again when he spoke to the Economic Club of Minnesota, where he made similar proclamations.
However much attention we’ve placed on the Fed, it has become increasingly clear that it can only do so much to get the economy out of its rut. And the few tools it has left likely won’t do much to help the average American.
Indeed, the Fed has shown its commitment to keeping our economy chugging along. Now the commitment must come from Congress as the central bank exhausts its powers.
In the coming months, many expect Bernanke to act. The most likely action would be a move dubbed “operation twist,” where the Fed would sell short-dated Treasury debt and use the proceeds to buy long bonds in hopes it would drive long-term interest rates down further. Though the move is unusual, the Fed tried it back in the 1960s. During the span of operation twist between 1961 to 1965, 10-year Treasury rates stayed at about 4% — only to double to 8% when the program ended in 1965.
But it’s anyone’s guess if it will really do much to spur long-term investments this time around. After all, 10-year securities are unprecedentedly low, hovering at about 2%. And even though this has helped send mortgage rates to record lows, it hasn’t encouraged many to refinance or take on new home loans.
In fact, mortgage applications for home purchases fell by 6.9% in August over the previous month – the fourth decline in as many months, leaving the level of applications at a 15-year low, according to Paul Dales, economist with Capital Economics.
And while record low rates have encouraged more households to refinance, it’s unlikely that even a significantly bigger bump in refinancing will do much for the overall economy, according to a working paper by the Congressional Budget Office that looked at large-scale mortgage refinancing programs.
The Fed has another option. It could reduce or eliminate the 0.25% interest rate the Fed currently pays banks that keep cash on reserve. This could make it less attractive for banks to hold onto their cash and possibly encourage them to make more loans. The problem, however, is that injecting more cash into the economy could encourage inflation. What’s more, even if more loans are made available, households may hesitate to borrow more as many continue to deleverage after years of too much spending.
Whatever the Fed decides, monetary policy alone won’t help revive the economy. Congress must step up – starting with the jobs plan President Obama unveiled last week. Indeed, it’s far from perfect, but the proposal appears to strike at the heart of America’s economic woes: weak demand.
According to Moody’s Analytics economist Mark Zandi, the plan would add 2 percentage points to GDP growth next year. It would also add 1.9 million jobs and reduce the unemployment rate by a percentage point.
To be sure, the plan comes with a hefty price – about $250 billion in tax cuts and $200 billion in spending for a total of $450 billion. And needless to say, it won’t solve the nation’s economic woes. The question is can it do better than the few options the Fed has left?