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Fed should increase dose to cure economy

Unemployment is close to 10 percent. Those jobless folks who do find jobs frequently make far less than in their previous positions.

American industry is operating at only three-fourths of capacity. Many factories — Severstal's steel mill at Sparrows Point is a dismal example — are turning out even less.

Price competition is tougher than ever, thanks to the global economy and weak demand. Companies must redouble cost cutting to get slump-mired consumers to buy. Cheap imports keep pouring in from China, and inflation at home is less than 2 percent. Meanwhile, home prices look like they'll continue to fall.

And Jeffrey M. Lacker thinks the Federal Reserve has done all it should to fuel the economy?

"For sure, growth has weakened a bit, but not by enough to, in my mind, warrant further monetary stimulus," Lacker, president of the Federal Reserve Bank of Richmond, said in an interview last week. "There's no question that the recovery has slowed a bit in the last month or two."

However, he said, "I still think we're going to get positive growth over the second half of this year."

There's a fight at the Fed about whether the country needs a big new dose of monetary medicine. The central bank has already taken the most extraordinary steps in its history to prop up the economy, cutting short-term interest rates almost to zero and buying up longer-term Treasury and mortgage debt like an out-of-control mutual fund with unlimited resources.

Lacker, whose bank district includes Maryland, is among a minority of top Fed officials who think enough is enough, at least for now. Although he's not a voting member of the Fed's key decision-making committee this year, Lacker opposed last month's Fed decision to add a little more juice by trying to lower longer-term interest rates.

Modest growth in consumer spending and some signs of life in manufacturing and information technology, he said, all indicate a sustainable recovery that doesn't need more help.

"It wouldn't surprise me to see firms stepping up capital expenditure plans for 2011 pretty significantly," he said.

It would surprise some. Why would business investment soar when companies aren't at anything close to capacity with the facilities they already have?

On Friday, the government delivered another dismal employment report. The Labor Department estimated that the nation lost 54,000 jobs in August, marking the third month of job losses in a row. Optimists noted that private-sector employers added a few jobs last month and that the overall loss was generated mainly by expiring census jobs, which everybody knew were temporary.

Still, unemployment edged up to 9.6 percent, close to its highest point in three decades. Count the millions of Americans who want to work but have given up looking for a job, and unemployment is even higher.

Lacker and his like are getting flak from those who think the Fed should be doing much more to change this. The central bank has already maxed out its traditional tool, the interest rate that banks charge each other for overnight loans and that sets the tone for other short-term rates. The overnight "federal funds" rate is about as close to zero as the Fed can make it.

Now the debate is about longer-term rates, which the Fed has tried to bring down with unusual purchases of longer-term Treasury debt as well as assets such as mortgage bonds the Fed typically doesn't hold. (Buying a debt security raises its price, which lowers the interest yield. Lower rates are supposed to make home purchases, business investment and other economically stimulating activity more affordable.)

A week ago, economist and New York Times columnist Paul Krugman urged the Fed to be bolder, warning of the somber consequences of "waiting for a recovery to happen all by itself."

The debate is going on inside the Fed, too. Its last meeting, on Aug. 10, "was among the most contentious" in recent years, reported the Wall Street Journal. On one side were "hawks" such as Lacker and Kansas City Fed President Thomas M. Hoenig, who oppose further stimulus. On the other was a majority of voting officials who approved a moderate new stimulus of reinvesting the proceeds of maturing mortgage bonds into longer-term Treasuries.

"I wasn't in favor of that," said Lacker, who said (diplomatically) that views in the meeting "were more evenly divided than in many meetings in the past." He added: "I thought that this was one of those exceptional occasions where there was a risk that a policy move like that would be taken as a signal that we think things are worse than we really do."

Well, many people think things are pretty bad, presumably including 14.9 million unemployed Americans. Lacker, Hoenig & Co. are worried about renewed growth and inflation pressures that just aren't there. That might just be their opinion, but they could be keeping the Fed from responding more forcefully to the crisis.

There will be plenty of time to ratchet back the stimulus when the economy starts adding jobs consistently and substantially. Meanwhile, people are hurting. Turn up the dial.

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