Fed Still Sees a Weak U.S. Economy

by John M. Curtis
(310) 204-8700

Copyright January 26, 2011
All Rights Reserved.                                

            Meeting at the Federal Reserve Board’s Open Market Committee, Fed Chairman Ben S. Bernanke left interest rates alone and continued his “quantitative easing,” buying up $600 billion worth of U.S. treasuries.  Wall Street hiccupped once it sank in that Bernanke still sees the U.S. economy teetering on recession.  Investors hoped the FOMC would raise interest rates, signaling that the economy was heading toward more robust growth, especially elusive improvements in the jobs picture.  Along with Bernanke’s bad news, the Congressional Budget office projected the federal budget deficit at over $1.5 trillion, a staggering sum hurting the U.S. dollar abroad and triggering inflation in commodity markets.  While there’s no soft landing in the housing market, Bernake told Congress last month that the economy was poised for about 3% rise in Gross Domestic Product in 2011.

            Keeping the Federal Funds Rate at zero-to-a-quarter-percent was bad news for investors hoping to keep pushing major stock averages upward.  Breaking 12,000 briefly today, the Dow Jones Industrials retreated before the close.  Closing a 1,296, the  Standard & Poors 500  approached the elusive 1,300 barrier, signaling perhaps the beginning of a new bull market.  Hinting that there’s no disagreement at the Fed, all 11 members of the FOMC voted to keep interests the same and continue the repurchase of $600 billion in Treasury Bonds.  “This is the same language,” said economist Rober Brusca of FAQ Economics, an established economic forecaster.  “The language of disappointment from the Fed,” hinting at more sluggish economic growth, especially with U.S. jobs.  More problems supplying jobs spells slower growth and possibly a double-dip recession down the road.

            Some Fed-watchers had hoped Beranke would rescind his decision on “quantitative easing” as the economy showed more growth.  Contrary to worries about hyperinflation, the Fed’s move sees deflation, not inflation, as the biggest challenge going forward.  More anemic activity in the housing market also indicates that the economy could limp along for some time.  Philadelphia’s Fed President Charles Plosser and Dallas Fed President Richard Fisher had been more worried about how Bernanke’s quantitative easing could trigger renewed inflation.  With the housing market still in the tank and unemployment still high, it’s unlikely to see inflation anytime soon.  Rising commodity prices have more to do with currency fluctuations than renewed demand based on a global increase in the business cycle.  Gold and oil prices continue to hover around two year highs.

            Consensus at the FOMC signals to Wall Street that the current bull market may not be sustainable unless publicly traded companies add significant amounts of jobs.  “It’s one thing to be vocal, it’s a completely different thing to cast a vote against the chairman,” said Busca, viewing the FOMC’s decision as bad news for the economy.  President Obama’s recent commitment to put the economy into “overdrive” indicates that he means business when it comes to bilateral trade agreements.  He hinted, though obliquely, in last night’s State of the Union speech, that he’s changing the game with South Korea, a major U.S. trading partner.  Without threatening a trade war, the White House has quietly insisted that the ever-consumer-popular Korean electronics’ industry begin manufacturing in the U.S.  Quiet pressure on foreign automakers to manufacturer in the U.S. has paid rich dividends.

            Pressuring South Korean big-screen TV-makers and major-appliance makers to manufacture in the U.S. should help the U.S. jobs market.  Adding more U.S. jobs results in more consumer spending and improvement in GDP.  Foreign TV and appliance makers want to sell more products in the U.S. market.  They know that higher unemployment translates into more sluggish sales.  More employment, conversely, translates into more consumer spending, especially for big ticket items like flat-screen TVs and major appliances.  White House officials also know that more employment translates into more tax revenues and smaller budget deficits.  Barack’s State of the Union Speech drew high praise from liberals but did little to inspire conservatives looking to cut government spending.  It’s better to reduce deficits by increasing employment than slashing  government spending

            Looking at the big picture, the Fed continues to push the stimulus pedal to the metal, keeping interest rates at historic lows.  Given today’s sluggish economy, White House and Congressional leaders must continue to find more ways to stimulate the economy.  When obstacles like runaway pump prices pop up, the White House must confront industries gouging consumers at the expense of the economy.  Obama mentioned his efforts with health care to stop the insurance industry from runaway price increases.  He also needs to confront the oil industry before it’s too late.  Runaway pump prices become another punitive tax, robbing consumers of the cash needed for consumer purchases.  To keep the stock market and economy rolling, Bernanke must continue low interest rates until he sees concrete improvements in the unemployment rate and more folks going back to work.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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