Headed Toward Recession, Fed Has Few Options

NEW YORK (TheStreet) -- The U.S. economy is drifting toward recession, but when Federal Reserve policymakers meet next week, they will have few options.

Jobs creation slipped alarmingly in April and May. Wages, which were rising modestly through the recovery, have been virtually flat for three months. An already tough labor market is getting worse.

Worker productivity is down, indicating businesses have more employees than needed to meet demand. Layoffs will follow if sales don't pick up. Deteriorating conditions in Europe, and a weaker euro and Chinese yuan, indicate U.S. exporters and import-competing businesses face a tougher environment this summer.

In manufacturing, the bright star of the recovery, new orders declined the last two months. Manufacturers and service businesses, polled by the Institute of Supply Chain management, report falling prices. Slashing prices to maintain sales is an ominous precursor of more layoffs.

The Federal Reserve 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 Federal Reserve Open Market Committee last met on April 25 more bond purchases to push down long-term Treasury and mortgage rates were on the table. Since then, investors have moved cash from risky European government bonds to U.S. securities. 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 effect on investor and home-buyer psychology -- already, few expect the Fed to push up interest rates in the foreseeable future.

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.

Demand for U.S. products is burdened by huge trade deficits on oil and consumer goods with China -- both result from government inaction.

Two years ago, President Obama warned China he could act if it did not abandon its cheap yuan policy, which he says is slowing U.S. growth, but he hasn't taken any substantive steps. Stiff restrictions and bans on drilling in the Gulf, off the Atlantic and Pacific Coasts, and in Alaska are reducing U.S. production some 4 million barrels a day and doubling imports.