Options Few for Fed, Bush Meetings

Federal Reserve policymakers and a White House-selected roster of experts convene half a continent apart this week to respond to a sputtering economy, troubling financial signals from abroad and a depressed stock market.

But as officials weigh their options, they won’t find many, economists say. Washington has already used most of its weapons for handling economic trouble.

“The policy quiver has been depleted and, absent a major crisis, I’m not confident that we will use what remains wisely,” said former Federal Reserve governor and Clinton administration economic advisor Janet L. Yellen, now at UC Berkeley.

“There’s no obvious silver bullet,” added former Congressional Budget Office Director Robert D. Reischauer, now president of the Urban Institute, a Washington think tank. “We’re going to have to tighten our belts one notch and grind this one out.”

Federal Reserve officials gather Tuesday in Washington to consider whether to cut interest rates. On the same day, President Bush hosts a forum in Waco, Texas, that aides say is designed to highlight the economy’s fundamental soundness.

As Democrats took potshots at the guest list in Waco, calling it top-heavy with corporate chieftains, Bush noted Saturday in his weekly radio address that he has also invited workers and small-business owners for advice on what to do. He said he is “eager to hear from Americans from all walks of life, who are working hard to make ends meet in these uncertain economic times.”

But the weapon of choice will almost certainly be words, not deeds.

With its signal-sending federal funds rate already at a four-decade low, the central bank is expected to issue a statement acknowledging the risks to the economy, but to put off further rate cuts.

The White House concluded several weeks ago that it had done most of what it could for the economy, and that its biggest job now is convincing Americans that that’s enough.

Washington’s shortage of policy options is in no small measure the result of its aggressive use of tax- and interest-rate cuts and spending increases when the economy began to falter 18 months ago after a record-setting decade of growth.

As recently as last year, the Fed’s key interest rate stood at 6%, rather than its current 1.75%. And the government was running a $127-billion budget surplus, according to the CBO, instead of what is expected to be a $150-billion deficit this year.

Most analysts think the combination of rapid interest rate reductions by the Fed and at least the early stages of the president’s 10-year, $1.35-trillion tax cut was just what the economy needed and helped keep the country from suffering a longer, deeper recession than it ultimately did.

“It was an effort to do the right thing and do it early,” said Allen Sinai, chief global economist for the consulting firm Decision Economics Inc. in New York.

The conventional wisdom--and an explanation popular with the White House--for why Washington’s early and aggressive actions have yet to return the country to steady growth is that they were derailed by the September terrorist attacks.

But economists have become increasingly impressed at how little the attacks affected the overall economy after the initial shock. If anything, they say, it is the subsequent violence in the Middle East and the threat of a U.S. invasion of Iraq, rather than the destruction of the World Trade Center, that have weighed on growth.

Recent revisions of the gross domestic product, which measures the nation’s total output of goods and services, show that the economy shrank during the first nine months of last year and only resumed growth in the final three months after the attacks.

If the attacks had less effect on the economy than had been thought, some analysts worry that the stock market’s long slide and the recent corporate scandals may be having a much greater effect. “We’re off the map of post-World War II history with this stock collapse,” said Sinai, who is slated to participate in Tuesday’s White House-sponsored forum.

“The stock market is hurting the economy and the economy is hurting the stock market, and it’s all wrapped together in a scary, 1930s-like [stock market collapse] that could end badly,” he said.

These analysts are particularly worried that, despite a small increase in equipment and software spending last quarter, corporate America has still not shown much interest in resuming the kind of capital investments that helped fuel growth and improve economic efficiency in the final years of the 1990s. And without the investments, consumers are left to keep growth going on their own.

Consumers have proved incredibly responsive as the Fed pushed interest rates lower and lower, snapping up cars and houses at record rates. But analysts fear that the buying binge threatens to leave households overextended--and especially vulnerable to any real estate downturn.

In such circumstances, one might think the Fed and the administration would rush to use whatever further tax- and interest-rate cuts are still feasible to try to ensure that the economy does not slip back. And in fact, the Fed does appear ready to cut interest rates, although not until later this year.

But to date, the administration has been reluctant to take substantial new steps.

That appears to be equally because the White House thinks the economy is mending and not in need of extra help, and because most substantial new steps would require Bush to agree to change the 10-year tax cut that is considered his grandest legislative accomplishment to date.

Sinai and some other economists say Bush should agree to roll back tax cuts planned for later in the decade and use the savings for growth-spurring cuts now.

Yellen has called for a similar rollback, with the money to go for expanded unemployment compensation and grants to cash-strapped states.

Either way, the result would be to open the Bush tax package to renewed debate, something that White House officials have made clear they will not do.

In the absence of a big new tax or spending package, the administration is seeking to make do with smaller steps such as helping to bail out troubled trading partners such as Brazil and ensuring that the arrests of corporate executives get maximum publicity.