FED to continue twist, without shout

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.

FED stands ready, but does not make a change

In a closely watched speech in Jackson Hole, WY this morning, FED Chairman Ben Bernanke tried to boost investor confidence without announcing a new round of anticipated “quantitative easing” (QE). QE is an unconventional and controversial monetary policy in which central banks infuse a fixed quantity of newly created reserve cash into the economy by buying the assets of banks and “synthetically” inflating their value. In effect, this increases the money supply, and so long as banks begin lending again, stimulates economy activity. The policy is unconventional because it is a policy of last resort, and it has become the preferred way of central banks including the FED to address the ongoing financial crisis.

Quantitative Easing Explained (6 min. video)

The cartoon explanation is funny, but the facts on the ground are not so funny. Whether the FED has too much power over the economy, and whether it is good that its chair is insulated from democratic accountability, is a good independent question. After all, many people accused former FED Chair Alan Greenspan of having too much power.

However, in today’s political climate this means more direct politicization of this position, which is dangerous for the economy and American democracy. Gov. Rick Perry of Texas is now publicly brow beating and belittling Bernanke’s policies of economic stimulus. While on the campaign trail in Iowa last week, Perry said that if Bernanke “prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.” He went on to say that if Bernanke printed more money, the act would be “almost treasonous in my opinion.”

Bernanke made clear in Jackson Hole that the FED stands ready to assist, and investors jumped at the news with the DOW climbing steadily all morning and the NASDAQ seeing some forward momentum. But with anemic job growth and investors wary of the political impasse in Washington, the economy continues to falter. The news swings both ways from day to day, leaving investors and markets in the schizophrenic position of changing their minds with the news cycle. Perhaps Bernanke’s speech has made investors excited about the prospect of more public aid in the service of private profit? Depending what’s on the news tomorrow, only time will tell. ::KPS::