It was a statement of the obvious heard around the world. The Federal Reserve policy committee said on Tuesday that the economy had slowed recently and was not expected to improve anytime soon. Together with evidence of slower growth in China and Europe, the “news” sparked a global sell-off in stocks on Wednesday. At the same time, prominent private forecasts for growth in the second quarter were revised downward from a preliminary reading of 2.4 percent in the United States to less than 2 percent.
The market response sent an even louder message than the Fed statement — that the economy needs more and better help than it is getting and more, unfortunately, than it is likely to get in the current soured political environment.
No one should have been surprised by the obstacles to growth cited by the Fed — high unemployment, modest income gains, lower housing wealth and tight credit. Nor was it a surprise that the Fed pledged to keep interest rates low, given the faltering economy. As a practical matter, that means the short-term rate it controls will remain close to zero for the foreseeable future. And to keep downward pressure on long-term rates, like mortgages, it is planning to recycle the proceeds from its mortgage-backed securities, acquired during the financial crisis, into Treasury securities.
None of those measures add up to much of a boost, if any, because the Fed is not providing new stimulus. Rather, it is simply promising to not tighten the spigot prematurely. It also promised to do more if the economy were to deteriorate further, a reference to its ability — and, presumably, its willingness — to create new money to pump into the system to make credit even cheaper.
So why are the markets unnerved? Simply put, it is increasingly plain to see that the Fed has all but played its hand, and the economy is still in deep trouble. The economy’s central problem is not lack of money to hire workers or make loans or rates that are too high. It is lack of hiring and lack of lending, despite cash cushions at many corporations and big banks and rates that are already very low.
As long as the economy is weak and getting weaker, employers will be reluctant to hire new workers and banks will be reluctant to lend to small businesses. As long as hiring and lending are constrained, consumers will be reluctant to spend, and the economy will be weak.
A way out of that bind is stimulative fiscal policy, but Congress is gridlocked. Recent delays and cutbacks have shown that lawmakers cannot even be counted on to consistently provide emergency aid, like unemployment benefits, or robust support for obvious problems, like ailing state budgets. They have yet to provide new incentives for small business lending, let alone to support or even seriously debate bold ideas to create jobs, like a federally supported agency to help finance the repair and rebuilding of the nation’s infrastructure.
The Fed’s statement on Tuesday avoided the words deflation and double dip recession. But the markets heard them, still, because the Fed’s efforts alone are unlikely to steer the nation clear of those dangers.
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