Bloomberg News

Bernanke’s Next Easing May Not Do Much to Aid Jobless Americans

September 03, 2011

Sept. 3 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke will probably try to spur economic growth this month by cutting near-record-low borrowing costs, economists said. His new stimulus may not aid the 14 million Americans without work.

Hiring stalled in August in the worst month for U.S. employment in almost a year, the Labor Department said yesterday. The unemployment rate remained stuck at 9.1 percent.

The Fed may decide at its Sept. 20-21 meeting to replace short-term Treasury securities in its $1.65 trillion portfolio with long-term bonds in a bid to lower rates on everything from mortgages to car loans, said economists at Wells Fargo & Co., T. Rowe Price Associates Inc., Barclay’s Capital Inc. and Goldman Sachs Group Inc. The Fed’s influence on the economy will probably be muted as sagging consumer confidence, depressed home values and 6 million workers unemployed for six months or more weigh on demand.

“The problem is that rates have been low for three years now and that isn’t spurring people to buy,” said John Silvia, chief economist at Wells Fargo in Charlotte, N.C. “Companies won’t hire unless demand is there. The Fed can lower the cost of credit, but it can’t force companies to create jobs.”

Silvia predicts the economy will grow at a 1 percent annual rate in the second half of this year, little changed from the 0.7 percent pace logged in the first six months, the weakest stretch since the recovery began in June 2009.

Longer-Term

Bond investors are already anticipating that the Fed will sell short-term assets to finance purchases of longer-term assets, said Michael Pond, a managing director at Barclays Capital in New York.

Yields on U.S. two-year notes rose 2 basis points to 0.2 percent in New York trading, while yields on 10-year notes fell 14 basis points to 1.988 percent late yesterday.

“The market is clearly pricing in ‘Operation Twist,’” said Pond, referring to how the Fed action will change the Treasury yield curve. “Short rates are moving higher, while long rates are moving lower.”

Economic growth would need to be closer to 5 percent for a full year to lower the unemployment rate by one percentage point, Bernanke has said.

The Fed chief, in a speech last week to an economic conference at Jackson Hole, Wyoming, said the central bank has a “range of tools that could be used to provide additional monetary stimulus.” The costs and benefits of those tools would be debated more fully at the Fed’s Sept. 20-21 meeting.

Sustain Recovery

At the same time, Bernanke said the Fed alone can’t keep the recovery going. “Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” he said.

President Barack Obama plans to address a joint session of Congress on his plans to boost jobs and growth at 7 p.m. Washington time on Sept. 8. Bernanke is scheduled to give a speech on his economic outlook that day in Minneapolis.

“At the end of the day, the Fed is a bridge, and if the other agencies don’t react, it’s a bridge to nowhere,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the world’s biggest bond fund, said in a Bloomberg Television interview yesterday.

Fiscal stimulus is currently better suited to bolstering the economy and creating jobs than monetary policy, said Alan Levenson, chief economist at T. Rowe Price in Baltimore.

Road Work

With households and businesses intent on paying down debt, government spending on building or repairing roads, schools and bridges is more effective at generating jobs than interest rate reductions by the Fed, Levenson said.

“Fiscal policy is more helpful,” he said. “It is not that Fed policy makers are running out of ammunition, but rather the caliber of the bullets that they are shooting is getting smaller.”

The Fed expected the impact of its $600 billion government bond-buying program on hiring to be “relatively modest,” Bernanke told Congress on July 13. He cited estimates made in the fall that the program, which ended in June, could boost employment by about 700,000 over two years, or by about 30,000 extra jobs a month.

The Fed at the meeting this month will probably debate how much a third round of asset purchases would help growth and hiring. Some economists say it’s unlikely policy makers will announce a new quantitative easing program after the gathering.

‘Full Blown’

“We don’t think they’re quite ready to do a full blown QE3 at this point,” Dean Maki, chief U.S. economist at Barclays Capital, said in an interview on Bloomberg Television.

Still, extending the average maturity of bonds in the Fed’s portfolio “doesn’t do a lot,” Maki said. “The reason to do it is to give people the sense that the Fed is in motion, they are paying attention.”

Central bank officials may have a hard time convincing investors that they’ll sustain the same clout as before in influencing liquidity and inflation, said Paul Ballew, chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio.

The Fed’s first round of quantitative easing involved the purchase of $1.25 trillion in agency mortgage-backed securities and about $200 billion of housing agency debt. The Fed’s March 18, 2009, statement said the aim was to support “mortgage lending and housing markets.”

Second Round

The second round of quantitative easing, approved by the Fed in November 2010 and suggested by the chairman in a Jackson Hole, Wyoming, speech the previous August, was aimed at moving the U.S. economy away from deflation risk, the Fed said in its statement.

Expectations for inflation beginning five years from now jumped from 1.97 percent before Bernanke’s speech to 2.8 percent by the end of the year, according to a measure tracked by Barclays Capital. The impact of monetary policy on unemployment is delayed and much less direct, Ballew said.

“As you move further and further away from quantitative easing one, you move further away from the things the Fed can impact,” Ballew said. More bond purchases by the Fed would take aim at boosting economic activity and jobs, which are “a few degrees away from what the Fed could directly influence,” he said.

The Fed needs to do more to explain the rationale for another round of bond purchases, Ballew said. “If they are going to go down that path, they have a lot to do on the communication front,” he said.

--Editors: James Tyson, Carlos Torres

To contact the reporter on this story: Jeannine Aversa in Washington at javersa@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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