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Fed, QE3 can do little to boost sagging economy

By Peter Morici
web posted September 17, 2012

Last Thursday the Federal Reserve discussed further measures to boost the economy but Chairman Ben Bernanke has few arrows left in his quiver. Simply, Obama Administration missteps with China on trade and exchange rates and energy policies have permanently slowed growth, and Fed policies cannot overcome those massive handicaps.

The economy is growing at less than 2 percent. Unemployment has fallen to 8.1 percent, largely because so many folks have quit looking for work and are no longer counted in the official tally of joblessness.

Consumer spending and business investment have slowed, because Americans are pessimistic that President Obama's policies will fix the economy and are hunkering down for a long siege. Mitt Romney has not convinced voters he offers potentially effective alternatives, and despite a growing public wariness about the economy, the former Massachusetts governor lags in the polls.

The Federal Reserve Open Market Committee has 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 August 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.

Similarly, cutting interest rates on the deposits commercial banks keep at the Fed to encourage more banking lending won't help. At 0.25 percent, that rate is already close enough to zero to not matter very much at all.

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—or build new roadblocks to growth.

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. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission. Follow him on Twitter.







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