In a meeting that will be closely watched by economists and certainly the campaigns of President Barack Obama and his Republican challenger Mitt Romney, Federal Reserve policy-makers may decide this week whether a sickly economy needs more medicine.
We think it does.
Unemployment remains stubbornly stuck above 8 percent nationally, and growth continues to disappoint.
Understand, Fed action isn’t some magic elixir that will foster sudden and robust growth. At best, the Fed’s tonic could prevent another recession — although even that is not guaranteed, given the risks to the United States from languishing economies in both Asia and Europe.
Nonetheless, the Fed’s dual mandate to battle both inflation and unemployment requires it to act.
The latest data are troubling. The economy added only 80,000 jobs in June, and the unemployment rate remained at 8.2 percent. The government reported on Friday that the economy was expanding at a spare 1.5 percent in the second quarter, a meager growth rate that makes the nation even more susceptible to a shock — such as a collapse of the euro or the coming fiscal cliff in the U.S. at the end of this year when tax breaks expire and automatic spending cuts are due to take effect unless Congress takes action.
The Fed has options. It could:
—Jawbone: Policy-makers could extend their forecast of near zero percent short-term interest rates past late 2014 — their last target. A firm promise to keep interest rates low for a long period of time would give the economy a small boost without additional credit risk. And policy-makers could tie low interest rates to specific unemployment targets.
—Buy more assets: Known in Fedspeak as “quantitative easing” — in this case, “QE3” since it would be the third such move — the Fed could effectively drive more money into the system by purchasing Treasuries or mortgage-backed securities. Previous Fed bond-buying programs, even though relatively short-lived, helped reduce interest rates and encourage investors to buy riskier assets such as stocks. Again, the duration of those purchases could be tied to economic performance.
Critics fear another round of quantitative easing will make the patient sicker by promoting inflation. In a normal economy, that would be a significant threat. We’re five years from normal. There is no sign of inflation now or in the immediate future.
Of course, Congress should begin taking steps now to deal with the coming fiscal cliff at the end of the year. And, as Obama’s deficit-reduction commission suggested, the government should be adopting short-term stimulus now with an eye to long-term deficit reduction later. But with the question of stimulus spending so highly politicized in a presidential election year, there is virtually no chance of that.
Instead, businesses are left with little they can be certain about: the economy, the health care law, the direction of trade policy. And in the midst of all this turmoil, the Fed is the only government agency acting responsibly. Chairman Ben Bernanke should act — and soon.
©2012 Milwaukee Journal Sentinel
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