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Peter Morici: Fed Can Do Very Little to Help Stalled Economy

Tuesday, 19 Jun 2012 01:11 PM

Federal Reserve monetary policymakers have few options to revive the sluggish U.S. economy as the nation flirts with a recession, says Peter Morici, former chief economist at the U.S. International Trade Commission.

Unemployment rates are high and the overall economy weak, but monetary policy tools won't work, says Morici, now a professor at the Smith School of Business, University of Maryland.

Policy tools include outright bond purchases from banks, known as quantitative easing, or by extending a $400 billion program that shuffles the Fed's Treasury holdings, known as Operation Twist, which is due to expire this month.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

Under Operation Twist, the Fed sells short-dated Treasury instruments and buys longer-dated Treasurys in tandem with the aim of pushing down long-term interest rates.

Unlike quantitative easing, Operation Twist doesn't expand the Fed's balance sheet. That said, neither policy tool will do much, since they work to create job demand by pushing down interest rates, which are already low as it is thanks to past policy moves, Morici writes in a CNBC guest blog.

"The Federal Reserve has pulled all the levers that could make a significant difference. Short-term interest rates — such as the overnight bank borrowing — are already close to zero," says Morici.

Long-term rates are low thanks to past quantitative easing measures, Operation Twist and also due to a flight to safety, as the European debt crisis has fueled global demand for the U.S. Treasury, pushing down interest rates on U.S. debt which has kept rates lower across the broad economy.

"When the Federal Reserve Open Market Committee met in April more bond purchases to push down long-term Treasury and mortgage rates were on the table. Since, risk-averse investors have moved cash from Europe to U.S. securities. The 30-year Treasury and mortgage rates are near record lows, preempting the effectiveness of further Fed action," Morici writes.

The problem hampering U.S. recovery, Morici writes, have been government policy failures.

The Obama administration has not taken the steps it said it would to get China to strengthen its currency.

Bans to oil drilling and high healthcare costs continue to drag on growth, and tax and spending reforms need addressing.

"America is simply becoming too much like Greece and not enough like Germany, and not much the Federal Reserve does can compensate," Morici writes.

Federal Reserve Chairman Ben Bernanke himself has said that monetary policy is not the only medicine the country needs to restore itself to more lasting economic health.

Congress needs to do its part to address tax and spending issues.

"Monetary policy is not a panacea," Bernanke said during a congressional appearing earlier this month, ABC News reports.

"I would feel much more comfortable if Congress would take some of this burden from us and address these issues."

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans



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2012-11-19
 

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