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Archive for Saturday, August 14, 2010

No easy fix ahead for sluggish economy

Americans spent less in July

August 14, 2010

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— The Federal Reserve has little power left to lift the economy out of its rut. Congress, with an election looming, has no appetite for more stimulus. Shoppers are reluctant to spend, and businesses are slow to hire.

Let’s face it: There is no easy or imminent fix for the flagging recovery.

The sluggish economic summer wore on Friday with news that Americans spent less at most retail stores in July. Earlier this month came word that the trade deficit is ballooning and companies are not adding jobs fast enough to bring down unemployment.

Typically, the Fed can lower interest rates to encourage Americans to borrow money and spend it, invigorating the economy. But the benchmark interest rate controlled by the Fed has been almost zero for more than a year now.

The Fed this week took a new step by announcing it would use the proceeds from its huge portfolio of mortgage securities to buy government debt. The idea is to make cheap credit a little cheaper, particularly for things like mortgages.

The problem there: Americans who are worried about their jobs, not to mention volatility in the stock market, don’t want to borrow. They saved 6.2 percent of their disposable income this spring. Before the recession, it was more like 1.2 percent.

Sure, the Fed still has options. It could launch another trillion-plus-dollar program to buy government debt or mortgage securities like it did when it was battling the recession and financial crisis.

But the Fed is unlikely to commit that much money unless things get a lot worse. Plus there are risks. Regulators don’t want to push interest rates on mortgages so low that they encourage speculative buying, like the kind that inflated the housing bubble.

“It’s a pervasive level of uncertainty that people and businesses feel about their economic futures,” says Ken Mayland, president of ClearView Economics. “It’s frozen them into inactivity.”

Congress has the power to regulate the economy by adjusting tax rates and passing stimulus programs — the side of the equation known as fiscal policy, as opposed to the Fed’s monetary policy.

But there is little interest on Capitol Hill to undertake a major new stimulus effort. The midterm elections are less than three months away, and Republicans and Democrats alike fear voters are worried about the federal budget’s $1.4 trillion — and rising — deficit.

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