More Fed Action Hollow Substitute for Fiscal Stimulus
Federal ReserveChairman Ben Bernanke may be willing and able to provide more monetary stimulus for the U.S. economy, but the more effective medicine—fiscal aid out of Washington—isn’t in the wings, say economists.
“The Fed had s done about just as much as it can do to speed up the pace of recovery,” said longtime Fed watcher David Jones of DMJ Advisors.
Jones and other economists, who have been both critical and complimentary of the Fed, say they understand the market’s fixation with a Fed rescue package and Bernanke’s Jackson Hole, Wyo., speech Friday morning, but it is inappropriate at this point of the economic cycle.
“They’ve been conditioned to do it,” said Jones. “It’s so typical. Take (the second round of quantitative easing) . You could hear the equity analysts call for it as the stock market weakened.”
“It means they recognize the Fed is the last game in town,” said Robert Brusca, chief economist at FAO Economics. “At the same time, the law of diminishing returns applies to the Fed's monetary policy.”
If so, both the Fed’s choice of remedies and its impact are likely to lead to disappointment.
“There’s a little bit of desperation," said Scott Anderson, senior economist at Wells Fargo Securities. “This time it’s a bit different." The Fed’s 2009-2010 mortgage-backed-securities purchase program, or QE1, was a lot more effective than QE2, he said, adding "the biggest impact this time might be the psychological boost.”
Right now, the consensus is that a third round of easing, like the second round, would also involve Treasury purchases, but the goal would be to push down interest rates on long-term debt at the expense of short-term debt.
“If 600 billion dollars wasn’t a enough, then try a trillion dollars,” quipped Chris Rupkey, managing director at Bank of Tokyo-Mitsubishi. “In this low-rate environment, buying Treasurys is the only game in town.”
But there’s a growing chorus that it’s the wrong game in the wrong town.
“Monetary policy has reached the point of impotence,” said Brusca of FAO Economics. “What's happened is that monetary policy has been used and used and used because fiscal policy has been abused and abused.”
Others, Brusca among them, say previous fiscal measures were not the right kind, including the bulk of the near $900 billion Obama stimulus package.
Economists say the economy needs a good dose of fiscal policy, just at the time it is most unlikely to get one.
Following the long, divisive, and bruising battle over the U.S. debt limit extension, which capped years of policy debate and a wave of fiscal measures, “there’s policy paralysis and policy fatigue," in Washington, said Wells Fargo's Anderson. “Some think we've already thrown everything at the problem.”
FAO Economics' Brusca hopes that Bernanke will use the Jackson Hole speech to push what he calls a “bifurcated fiscal policy,” meaning stimulative spending in the short run and budget cuts on a long-term basis.
Job creation would have to be the heart of any stimulus program, many analysts say, but another extension of jobless benefits might be necessary in the short term. Other conventional measures that have been floated are infrastructure spending and a payroll tax cut.
Bank of Tokyo's Rupkey, however, notes that the two-percent payroll tax cut this year didn't seem to have the desired effect.
Others, such as DMJ's Jones, favor quick and sweeping tax reform, as laid out by the Simpson-Bowles deficit commission report. That would include closing corporate loopholes and lowering personal and corporate income taxes.
If anything, the drum roll for jobs creation and will only grow louder as the 2012 election grows closer.
Of course, after trillions of dollars of monetary and fiscal aid over the past few years and little to show for it, skepticism creeps in.
Is the U.S. economy simply too big and diverse, and the global economy too much of a counter weight?
“These tools may simply be inadequate,” says Bank of Tokyo's Rupkey.