The New York Times
By: Binyamin Appelbaum
June 21, 2011
WASHINGTON -- The Federal Reserve hoped that its three-year-old economic rescue campaign would reach a climax at the end of June. It hoped that consumers and businesses by now would be spending more and more, and the central bank could start doing less and less.
That peak now looks like a long plateau. The Fed still is expected to announce Wednesday that it will halt the expansion of its aid programs at the end of June, as scheduled, when it completes the purchase of $600 billion in Treasury securities. But growth is sputtering, and economists now expect that the Fed will leave its $2 trillion of bandages, props and crutches untouched until next year.
The pace of economic expansion has repeatedly fallen short of the Fed's predictions, and the central bank is expected to lower its eyes once again when its releases a new forecast after a two-day meeting of its policy board, the Federal Open Market Committee.
Economic forecasters, many of whom also thought 2011 would be a more prosperous year, say that they underestimated the impact of the Japanese earthquake on the production of cars and other goods. They also point to a lack of confidence, an elusive concept that basically defines the willingness of consumers and businesses to spend more money than is justified by current circumstances.
"The most important thing I missed is how fragile confidence is. When anything goes off-script, the impact is magnified by this very fragile psyche," said Mark Zandi, chief economist at Moody's Analytics.
Ben S. Bernanke, the Fed's chairman, said this month in Atlanta that the recovery was continuing at a "moderate pace, albeit at a rate that is both uneven across sectors and frustratingly slow from the perspective of millions of unemployed and underemployed workers."
Mr. Bernanke will again answer questions from reporters Wednesday afternoon, part of a new practice the Fed has initiated to explain its policies and defend its judgments.
Since 2008 the central bank has taken a series of unprecedented steps to arrest the financial crisis and then to restore growth. It is holding short-term interest rates near zero, and has tried to reduce long-term rates by purchasing huge quantities of mortgage-backed securities and Treasuries. The final installment of those purchases is scheduled to take place next week.
Economists do not expect the event to ripple through the economy. The prevailing view is that the impact of the purchases was felt mostly at the time they were announced, based on the total amount the Fed promised to spend, and that markets have not responded to the daily transactions in which the Fed bought those Treasury securities from financial companies.
"Nothing will change on July 1," said James O'Sullivan, chief economist at MF Global. "Monetary policy will not be that different" because the Fed still will hold the Treasuries on its balance sheet.
Moreover, a number of studies have concluded that the Fed's efforts have had only a modest impact on the economy. Stock prices have climbed. Corporations have rarely been able to borrow money more cheaply. Mortgage loans have seldom been available at such low interest rates. But companies are hiring few new workers, and people are buying few new homes. Almost 25 million Americans cannot find full-time work, a number that is rising again after declining modestly over the last year.
When the economy faltered last summer, the Fed announced a giant stimulus program. This year, the leaders of the central bank have shown little appetite for another intervention.
Mr. Bernanke and other Fed officials have sought to discourage speculation in recent weeks, arguing that monetary policy cannot address the nation's fundamental problems, including the collapsed housing market, the federal deficit and trade imbalances with developing nations.
The political backlash against the current round of asset purchases is one reason for the Fed's timidity. Some at the central bank also see evidence of diminishing returns from additional spending. And the Fed has made clear that it its primary focus is on the pace of inflation, in part because the central bank regards slow, steady price increases as a prerequisite for sustainable job creation.
Last year prices were falling; this year, prices are increasing, and the Fed is frozen as a consequence as it searches for any indication that inflation will exceed its 2 percent speed limit.
"We're a long way from where we were last summer," Mr. O'Sullivan said.
The Fed also is waiting to see what Washington will do about its own financial problems. A failure to raise the debt ceiling, the maximum amount the government can borrow, could precipitate a financial crisis. Mr. Bernanke has said that short-term spending cuts could weaken the economy, while a long-term plan to reduce spending could increase growth.
"They won't rule out anything because they know a lot depends on what the fiscal policy makers do, and that is inherently unpredictable," Mr. Zandi said.