Monday, August 16, 2010

Sluggish recovery has no easy fix

WASHINGTON — The Federal Reserve has little power left to lift the economy out of its rut. Congress, with an election looming, has no appetite for more stimulus. Shoppers are reluctant to spend, and businesses are slow to hire.
Let's face it: There is no easy or imminent fix for the flagging recovery.

The sluggish economic summer wore on Friday with news that Americans spent less at most retail stores in July. Earlier this month came word that the trade deficit is ballooning and companies are not adding jobs fast enough to bring down unemployment.

Typically, the Fed can lower interest rates to encourage Americans to borrow money and spend it, invigorating the economy. But the benchmark interest rate controlled by the Fed has been almost zero for more than a year now.

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The Fed last week took a new step by announcing that it would use the proceeds from its huge portfolio of mortgage securities to buy government debt. The idea is to make cheap credit a little cheaper, particularly for things like mortgages.

The problem there: Americans who are worried about their jobs, not to mention volatility in the stock market, don't want to borrow. They saved 6.2 percent of their disposable income this spring. Before the recession, it was more like 1.2 percent.

"You can't force people to take out a loan or spend money that they don't want to spend," says Alice Rivlin, who served as the Fed's No. 2 official in the late 1990s.

Sure, the Fed still has options. It could launch another trillion-plus-dollar program to buy government debt or mortgage securities like it did when it was battling the recession and financial crisis.

But the Fed is unlikely to commit that much money unless things get a lot worse. Plus there are risks. Regulators don't want to push interest rates on mortgages so low that they encourage speculative buying, like the kind that inflated the housing bubble.

Or the Fed could cut to zero the rate it pays banks to keep money parked there, a move aimed at getting banks to lend more. But banks are not exactly feeling free with their cash, either.

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