Fed keeps money cheap. What else is new?

August 9, 2011, 11:58 PM UTC
Fortune

FORTUNE – In a bid to reboot the economic recovery following a global stock rout, the Federal Reserve is sticking by its old toolbox.

The Federal Open Market Committee today signaled plans to keep interest rates exceptionally low. Officials have resorted to this policy prescription since 2008 in hopes of helping keep borrowing rates low and drive investors into riskier assets like stocks. What’s different this time is that the Fed has explicitly spelled out a timeline, saying that it would keep its benchmark interest rate at a record low at least through mid-2013.

This might sound like a bold move to some, but it likely won’t do much to jolt our tepid economic recovery. The action merely underscores what most of us already know: The economy stinks!

The Fed essentially confirmed that in a statement following the FOMC meeting. As expected, it adopted a wait-and-see approach without embarking on anything too dramatic, including unleashing another round of large-scale bond purchases called quantitative easing. (See: Don’t look to the Fed for a rescue)

For now, it seems the Fed is sitting idle. And who could blame it? Officials could pump billions of dollars into the economy but it’s questionable if that will really do much to spur faster growth or bring down our annoyingly high unemployment rate.

“My take on the Fed is that they do not have any effective tools available to help the economy,” writes Columbia University economics professor David Beim in an e-mail. “The classic macroeconomic prescription of easy monetary policy has been used to the max, together with quantitative easing, together with very loose fiscal policy, and these have not budged the economy.”

This isn’t all that surprising. After all, companies are flushed with cash. The nation isn’t exactly suffering from a liquidity problem.

What’s really ailing our economy is perhaps beyond the Fed’s control.

“…The obstacles to economic recovery lie elsewhere: over-indebted consumers, over-built real estate and under-educated workers,” Beim adds. “Fixing these structural problems in a short time frame, however, is unlikely. Throwing more money at them is ineffectual.”