Inflation Hawks: Call Home : U.S. economy needs Fed to inject money fast
The latest unemployment figures appear to be pooping the recovery party. The data showed virtually no new hiring in July and one major unpleasantry: a continued and worrisome loss of jobs. That cast a pall over rosy assertions that the recession is over.
Is the tiny but promising economic uptick in the second quarter thus an anomaly? Enough people think so to call for the Federal Reserve to step in immediately with another quarter-point cut in interest rates. Pumping more money into the system would bolster the delicate recovery.
CONFIDENCE EROSION: The Labor Department reported Friday that July’s unemployment rate dipped slightly, to 6.8% from 7%. But the improvement was the result of a huge number of Americans--420,000--simply opting out of job market, not from any upswing in the economy. In fact, layoffs rose sharply, with U.S. firms cutting 51,000 workers. California’s unemployment picture was better but not much.
Analysts had expected there would be a national increase by about that many jobs in July. A slight hiring rally would certainly have been in line with the start of a slow economic recovery. The July unemployment data is disturbing because that month begins the third quarter and it is unclear whether the economic growth recorded in the April-June period can be sustained for the rest of the year. The nation’s gross national product rose a tiny 0.4% in the second quarter, the first growth in six months.
The July unemployment report could add new uncertainty to the economic outlook--and throw more cold water on already chilled consumer confidence. So this is no time for the overbearing inflation hawks at the Fed to be unduly conservative--the economy needs another jump-start.
DIP REDUCTION: It’s true the Fed has cut rates six times since last August. But it was slow to act at the onset of the recession because it feared a rise in inflation--and that fear persists. But it is better to err now on the side of inflation than to risk a “double dip” recession. Given the time it takes for Fed interest rate cuts to work into the system, the more expeditiously the Fed moves, the better.
Two unique factors in this recession have further complicated the usual remedy provided by Fed interest rate cuts. The first rests with banks. Hard-pressed to meet new capital standards and slow to pass on interest rate cuts, they remain tight-fisted lenders. This unofficial credit crunch varies in severity from region to region and industry to industry. Big businesses in particular complain about tight money. Making more money available should make borrowing easier.
The other factor, outside the Fed’s control, is the unprecedented competition for money worldwide. A suddenly pressed Germany needs money for the costly reunification of the country. A scandal-racked Japan is working to get its own financial house in order. Both countries are keeping rates up. That in turn has put upward pressure on long-term U.S. interest rates.
Liquidity and confidence are crucial to a U.S. financial recovery. The Fed must act.
