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Wednesday, July 25, 2012



Fed has few options as global growth slows




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For the first time in decades, the U.S. Federal Reserve is looking like a toothless tiger.

As it becomes clearer that the multiple gears of the worldwide economy are slowing in unison, pressure is mounting on the world's largest central bank to spur growth. But with the cost of borrowing money already at historic lows, it’s far from clear whether further measures aimed at making money cheaper will help.

"They have a hammer and they're looking for a nail," Alan De Rose, managing director of governmenttrading and finance at Oppenheimer, told Reuters.
The Fed's policy-setting committee meets next week amid reports that it may be close to taking fresh action to stimulate the flagging economy. With businesses worried about taking on new risk and households struggling to make ends meet, fresh data this week point to an ongoing economic slowdown in the U.S.
The Commerce Department’s initial estimate of second quarter gross domestic product, due Friday, is expected to show the growth rate slowed to 1.2 percent from 1.9 percent in the first three months of the year. The slowdown follows a series of monthly reports pointing to a weakening job market and a stubbornly high unemployment rate.

American businesses continue to feel the impact of a deepening recession in Europe. Surveys of Europe's private sector this week showed the contraction that began in the eurozone's weaker economies has now spread to Germany and France. Across the 17 countries that use the euro, manufacturing output has tanked. Consumers are gloomier than they've been since 2009.

As the European meltdown weighs on the overall U.S. economy, states that rely heavily on exportsare most at risk from the deepening crisis overseas.

When the global credit markets collapsed in the fall of 2008, central banks around the world quickly exhausted the primary tool they’ve reliably used to fight financial fires for decades: slashing the interest rates on money lent directly to banks. Despite those efforts, the world economy slid into a nasty recession.

Since then, the Fed has employed a set of new tools, including the purchase of some $2 trillion in bonds to lower rates on other forms of credit, among them home mortgages. For a time, those moves seemed to revive growth: gross domestic product and hiring picked up last year, and the housing market appeared to have stabilized.

Despite a flurry of press reports of possible new moves, the Fed is not expected to make any fresh announcements before its next two-day policy meeting next week. Even then, most of the measures under consideration have already been tried.

Buying more bonds could help prop up the financial markets, but would do little to spur borrowing and lending. With interest rates at or near record lows, extending the promise to provide ultra-low rates beyond 2014, by itself, isn’t likely to encourage businesses and consumers to take on more risk.

So, with global economy slowing, the Fed is reaching deeper into its toolbox.

With borrowers on the sidelines, Fed policy makers are considering measures to try to prod bankers to push more money into the system. One such move would be to reward banks that make more loans, an idea borrowed from a recent program launched by the Bank of England. Bernanke hinted to reporters in June that the Fed was considering the plan.

Another measure aimed at prodding bankers to move more money out of their vaults and back into the economy would involve cutting the interest rate the Fed pays financial institutions to park their cash reserves with the central bank, which now stands at 0.25 percent.

But no matter how many creative new moves they try, Fed chairman Ben Bernanke has concededthat the impact of these policies will be limited. As he warned lawmakers last week, the central bank faces major obstacles to its mission of promoting strong growth and steady prices that are beyond its control.

"The recovery in the United States continues to be held back by a number of other headwinds, including still-tight borrowing conditions for some businesses and households, and the restraining effects of fiscal policy and fiscal uncertainty," Bernanke told a Senate panel.

Translation: Companies and consumers are still having a hard time qualifying for loans. And unless Congress and the White House head off the looming $600 billion “fiscal cliff” of massive tax increases and spending cuts, there is little the central bank can do to stave off another recession.

The Fed isn’t alone in its predicament.

With the world now locked in what appears to be a coordinated slowdown, central banks around the world have been flooding the system with money to prod businesses and consumers to borrow and spend.

But the global economy continues to lose momentum. The slowdown is most pronounced in Europe, where a deepening debt crisis is weighing on business and consumer confidence and hammering the banking system.

Like their American counterparts, European central bankers are struggling to push money into the economy. But deep government spending cuts in Greece and Spain have left many households without a paycheck to spend. And in the midst of a debt-induced a financial storm, business and consumers across the continent are in no mood to borrow. A closely watched European Central Bank survey Wednesday showed that demand for credit remains weak in the eurozone.

In China, the last major economy showing strong growth, that forward momentum is also slowing.Though still booming compared to developed economies, Chinese officials are trying to steer their emerging economy on a course that maintains robust growth but avoids a ruinous run-up in prices.

After adopting measures last year to cool an emerging price bubble, Beijing is now moving to boost growth again. But those measures are expected to be too limited to help revive the rest of the global economy.

Reuters contributed to this report.

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