Fed Can Do Little to Boost Sagging Economy
Simply put, Obama Administration missteps with China on trade, exchange rates and energy policy have permanently slowed growth, and Fed policies cannot overcome those massive handicaps.
The economy is growing at less than 2%. Unemployment has fallen to 8.1%, largely because so many folks have quit looking for work and are no longer counted in the official tally of joblessness. Consumer spending and business investment have slowed, because Americans are pessimistic that President Obama's policies will fix the economy and are hunkering down for a long siege.
Meanwhile, Mitt Romney has not convinced voters he offers potentially effective alternatives, and, despite a growing public wariness about the economy, the former Massachusetts governor lags in the polls.
The Federal Reserve Open Market Committee has said that it "will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions."
Unfortunately, the Fed has already pulled all the levers that might make a difference. Short-term interest rates, such as the overnight bank borrowing rate and one-month and one-year Treasury Bill rates, are already close to zero.
When the FOMC met in August, more bond purchases to push down long-term Treasury and mortgage rates were already on the table. However, over the last several months, investors have moved cash from risky European government and corporate securities to U.S. bonds. The 30-year Treasury and mortgage rates are now near record lows, preempting the effectiveness of any additional Fed measures.
A statement that the Fed intends to keep short rates near zero beyond 2014 would have little impact on investor and homebuyer psychology -- already, few expect the Fed to push up interest rates in the foreseeable future.
Similarly, cutting interest rates on the deposits commercial banks keep at the Fed to encourage more bank lending won't help. At 0.25%, that rate is already close enough to zero to not matter very much at all.
Central bank policy can help dampen inflation when the economy overheats and lift borrowing and home sales a bit when it falters, but it can't instigate faster growth when the President and Congress fail to address structural problems -- or build new roadblocks to growth.