Bernanke is Bluffing: Fed Powerless to Avert Recession


The Federal Reserve has indicated it will take further steps as necessary to promote a stronger economic recovery. Sadly, the Fed’s bullets are spent, and the U.S. economy is skidding as a result of Administration missteps.

The economy is growing at less than 2%. Unemployment holds steady at 8.2% only because so many folks have quit looking for work and are no longer counted in the official tally of joblessness. Consumer spending has slowed substantially, because Americans are pessimistic that President Obama’s economic policies will fix the economy and are hunkering down for a long siege. They are simply not convinced Governor Romney offers sufficiently effective alternatives and the personal qualities to be President.

At the conclusion of its August 1 meeting, the Federal Reserve Open Market Committee stated 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 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 met in June 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 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.

President Obama has significantly curtailed production of oil offshore and in Alaska, and refused calls from economists across the ideological spectrum to force China to stop manipulating its currency. Together, reversing those actions would create at least five million jobs.

Now conditions in Europe threaten to pull down an economic recovery, made needlessly fragile by policy missteps beyond the purview of the Federal Reserve.

Lacking better policies from the Oval Office, there is little the Federal Reserve can do.Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.