The economic recovery has become even more sluggish, particularly in the labor market where hiring in both the private and public sectors has slowed to a near standstill. Weak job reports, deep debt among consumers and governments, the evolving crisis in the euro zone, and of course the uncertainty of a presidential election are all conspiring to undermine investor confidence in the near term. The markets have been slow to bounce back, and when they do it is an erratic “one-step forward, two-steps back” form of recovery.
Yesterday’s announcement from the chairman of the FED, Ben Bernanke, that it would moderately expand its policy called “Operation Twist” to stimulate growth did little to bolster that confidence. With the economy stumbling into the summer months after the false promise of a relatively strong winter, the Fed announced a modest expansion of its efforts to stimulate growth. The central bank pledged to buy $267 billion in long-term Treasury securities over the next six months in order to reduce borrowing costs. The intended consequence of reducing borrowing costs is to stimulate consumers and small businesses to borrow more money and spend it.
In its report the Fed stated it now expected growth of 1.9 percent to 2.4 percent this year, half a percentage point lower than they forecast in April. In addition, it predicted the unemployment rate would not drop below 8 percent this year, and that inflation would not go above 1.7 percent. Bernanke noted in the press conference that the outlook could worsen if events in the euro zone worsen, unnerving financial markets, or if politicians in Washington failed to resolve a stalemate over fiscal policy.
It remains an open question whether the 17 governments of the EU can coordinate their talents to overcome the euro’s financial morass, but the stalemate in Congress between Democrats and Republicans is sure to continue well past November. Political impasse to resolve this nation’s pressing financial woes is, if anything is in this world, a sure bet. This means more hard times ahead for America’s middle class and even worse times for the least well off among us.