Stimulus by Fed Is Disappointing, Economists Say
WASHINGTON — The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.
But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs.
As the Fed’s policy-making board prepares to meet Tuesday and Wednesday — after which the Fed chairman, Ben S. Bernanke, will hold a news conference for the first time to explain its decisions to the public — a broad range of economists say that the disappointing results show the limits of the central bank’s ability to lift the nation from its economic malaise.
“It’s good for stopping the fall, but for actually turning things around and driving the recovery, I just don’t think monetary policy has that power,” said Mark Thoma, a professor of economics at the University of Oregon, referring specifically to the bond-buying program.
Mr. Bernanke and his supporters say that the purchases have improved economic conditions, all but erasing fears of deflation, a pattern of falling prices that can delay purchases and stall growth. Inflation, which is beneficial in moderation, has climbed closer to healthy levels since the Fed started buying bonds.
“These actions had the expected effects on markets and are thereby providing significant support to job creation and the economy,” Mr. Bernanke said in a February speech, an argument he has repeated frequently.
But growth remains slow, jobs remain scarce, and with the debt purchases scheduled to end in June, the Fed must now decide what comes next.
The Fed generally encourages growth by pushing down interest rates. In normal times, it reduces short-term interest rates, and the effects spread to other kinds of borrowing like corporate bonds and mortgage loans. But with short-term rates hovering near zero since December 2008, the Fed has tried to attack long-term rates directly by entering the market and offering to accept lower returns.
The Fed limited the program to $600 billion under considerable political pressure. While that sounds like a lot of money, the purchases have not even kept pace with the government’s issuance of new debt, so in a sense the effort has amounted to treading water. And a growing body of research suggests that the Fed could have had a larger impact by spending more money on a broader range of debt, like mortgage bonds, as it did initially.
A vocal group of critics, meanwhile, argues that the Fed has already done far too much, amassing a portfolio of more than $2 trillion that may impede the central bank’s ability to raise interest rates to curb inflation. Some of these critics view the rising price of oil and other commodities as harbingers of broader price increases.
“I wasn’t a big fan of it in the first place,” said Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia and one of the 10 members of the Fed’s policy-making board. “I didn’t think it was going to have much of an impact, and it complicated the exit strategy. And what we’ve seen has not changed my mind.”
The Fed’s decision to buy bonds, known as quantitative easing, emulated Japan’s central bank, which started buying bonds in 2001 to break a deflationary cycle.
The American version worked well at first. From November 2008 to March 2010, the Fed bought more than $1.7 trillion in mortgage and Treasury bonds, holding down mortgage rates and reducing borrowing costs for well-regarded companies by about half a percentage point, according to several studies. That is an annual savings of $5 million on every $1 billion borrowed.
As the economy sputtered last summer, Mr. Bernanke indicated in an August speech that the Fed would start a second round of quantitative easing, soon nicknamed QE 2. The initial response was the same: Asset prices rose, interest rates fell, and the dollar declined in value.
But in addition to being smaller, and solely focused on Treasuries, there also was a problem of diminishing returns. The first round of purchases reduced the cost of borrowing by persuading skittish investors to accept lower risk premiums. With markets closer to normalcy, Mr. Bernanke warned in his August speech that it was not clear that the Fed would have comparable success in persuading investors to accept even lower rates of return.
“Such purchases seem likely to have their largest effects during periods of economic and financial stress,” he said.
The Fed says that its expectations were tempered by these realities, but that the program nonetheless has lowered yields on long-term Treasury bonds by about 0.2 percentage point relative to the rates investors would have demanded in the Fed’s absence. That is about the same impact the central bank might have achieved by lowering its benchmark rate 0.75 percentage point, which in normal times would be an aggressive move.
But some economists say the new program has had a more limited impact on the broader economy than would a traditional cut in short-term interest rates. The Fed predicted that investors would be forced to buy other kinds of debt, reducing rates for other borrowers. But the supply of Treasuries available to investors has grown since November, as issuance of new government debt outpaced the Fed’s purchases.
A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.
Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.
“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?”
Economic Recovery: Don’t Slam on the Breaks— Los Angeles Rally Sends Message to Congressional Leaders in Washington – “NO To HR1″
Van Nuys, CA (PRWEB) April 8, 2011
On March 23, 2011, Veterans, environmentalists, educators, service-providers, job-seekers, members of Congress, celebrities and other concerned Angelinos showed up to rally in downtown Los Angeles against $61 billion in potential federal budget cuts that could undermine national economic recovery.
Rally speakers included Los Angeles Mayor Antonio Villaraigosa, Congressmembers: Maxine Waters, Lucille Roybal-Allard, Karen Bass, Laura Richardson, Judy Chu, Councilman Richard Alarcon, actor/activist Tim Robbins, actor/activist Mimi Kennedy, actor/environmentalist James Crowell and a huge crowd of concerned citizens supporting the 100+ local social service agencies threatened by the proposed cuts. An outpouring of media covered the Rally which in lieu of the passing of a major celebrity and impending rainstorm that day, showed the extent of media support which included every major English and Spanish news crew and print outlet plus Korean, Russian TV, Thai TV, Chinese TV, etc.
A compelling seven minute video, “Wake UP Everybody!” by was culled from the footage of the Rally which poignantly depicts the state of America today. The video created by Los Angeles filmmaker, Tess Cacciatore includes Rally speakers, street photos showing homelessness, joblessness, and the plight of Americans struggling to live a decent life with underlaying music by legendary musicians, Marvin Gaye (“Inner City Blues”) and Harold Melvin & the Bluenotes (“Wake Up Everybody!”). A heart-breaking sign of the times depicting a dismal future unless people “wake up” to seeing what is going in America today!
This bill will impact every state of our nation and we encourage everyone to pay attention to how this will impact you and your community. Find out who to contact in your city, state or your elected officials in Washington. It''s time we all WAKE UP!
The budget approved last month by the House of Representatives could kill as many as one million jobs nationally-- in construction, education, public safety, technological innovation and green job sectors according to economic analysts. The cuts would also undermine job training funding and support to employers’ recruiting programs.
The City of Los Angeles would take a $571 million hit, and LA County well over $1 billion. This reduction in funds would severely impact job creation and could derail economic recovery. Cuts would eliminate programs that support small businesses in their efforts to avoid lay-offs, along with training and job placement programs, funding for economic development projects and support for law enforcement and other public safety functions. There would be major reduction in support for the new technology initiatives that create energy efficiency and reduce energy consumption and greenhouse gases.
“Job creation needs support, not more economic uncertainty brought on by de-funding programs that invest in LA’s workforce and infrastructure,” said Sophia Esparza, spokesperson for the Southern California Workforce Partnership (SCWP). “Our economic recovery needs jobs. It’s a bad time to take a hatchet to budget items that provide investment for innovation and support for both employers and employees trying to match jobs and skills.”
Last month, the House passed H.R. 1 which called for $61 billion in spending cuts over the previous fiscal year. The bill has not been taken up in the Senate. Instead the House and Senate have passed and the President has signed two short-term Continuing Resolutions which cut $10 billion in spending and funds the government through April 8. The Wednesday rally aims to convince the Congress that now is not the time to enact drastic cuts like those envisioned in H.R. 1 that would threaten the economic recovery and produce more job losses.