The Fed in a bind

PITY the Federal Reserve. As it demonstrated again Wednesday, the central bank remains hostage to changing financial markets and global economic conditions. This is making it very hard for Fed officials to communicate a clear and consistent policy path that will be pursued for any significant period of time. The Fed's statement recognized a slowing of U.S. economic growth that encompasses inventory spending and exports. It also seemed less confident about the outlook for inflation rising to the target level. Furthermore, as an acknowledgment that this unwelcome domestic slowdown is principally driven by economic developments abroad and volatile global financial markets, Fed officials shied away from setting out their traditional assessments of the "balance of risks."

The central bank confirmed what markets had anticipated and priced into the short-term segments of the fixed-income markets: Not only would there be no immediate repeat of the December interest rate hike, but it will be difficult for the Fed to make good on the expectations of four hikes that it signaled for 2016. As a result, officials are being forced to revise -- yet again -- their communications; and there will be much complaining about their policy conviction and credibility. All of this reflects a much deeper and unfortunate situation. The U.S. economy has repeatedly failed to achieve the economic liftoff that it is capable of and needs, and that has made the Fed overly vulnerable to developments abroad and volatile global financial markets. The central bank has become hostage to inadequate policy responses around the world, but also to an excessively partial U.S. approach that has been too reliant on experimental monetary policy for too long. As I explain in depth in my new book, "The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse," it is up to other policy makers, such as a functioning Congress working cooperatively with the executive branch, to extricate the Fed from an increasingly difficult situation. The longer they wait, the greater the threat of the Fed repeatedly being unable to set out and maintain a consistent policy stance. And the more it is unable to do so, the greater the risk that the Fed will go from being part of the solution to becoming part of the problem.