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Fed says U.S. economy has slowed, takes no new steps
Fed officials have signaled in speeches their concern about job growth and consumer spending. Bernanke told Congress two weeks ago that the Fed is prepared to take further action if unemployment stays high.
Worries have also intensified the U.S. economy will fall off a “fiscal cliff” at the end of the year. That’s when tax increases and deep spending cuts will take effect unless Congress reaches a budget deal. A recession could follow, Bernanke has warned.
Economists also are concerned that the debt crisis in Europe could intensify. Borrowing costs are too high for many governments, including Spain and Italy, and growth is slowing across the region as the effects of budget-cutting take hold. Unemployment hit a record 11.2 percent in June for the 17 countries that use the euro currency.
The ECB holds a policy meeting Thursday and expectations are rising that it could try to jolt the region’s financial system through bond purchases or other measures. ECB President Mario Draghi said last week that he was ready to “do whatever it takes” to save the euro currency union.
The Fed has already completed two programs aimed at driving down interest rates to encourage more borrowing and spending. It bought more than $2 trillion in Treasurys and mortgage-backed securities, expanding its balance sheet above $2.8 trillion.
The Fed has been running a program since September in which it sells short-term Treasurys and buys longer-term Treasurys. The program, called Operation Twist, will run through the end of the year and shift $667 billion from short-term to longer-term Treasurys
Even if the Fed launched a third round of bond purchases, few think that further lowering long-term rates would provide much benefit to the U.S. economy. Most businesses and consumers who aren’t borrowing now aren’t likely to change their minds if rates slipped a bit more.
The yield on the benchmark 10-year Treasury note is already near its record low of 1.39 percent, which it touched last week. The national average rate for a new-car loan barely tops 3 percent. And the average on a 30-year fixed-rate mortgage fell below 3.5 percent last week for the first time on records dating back 60 years.
Some regional Fed bank presidents have expressed concern that expanding the Fed’s balance sheet beyond its current record $2.9 trillion to try to lower rates more would heighten the risk of high inflation later.
For now, U.S. inflation is low. Core consumer prices, which exclude volatile food and energy costs, have risen just 2.2 percent over the past 12 months. That’s near the Fed’s 2 percent target for inflation.
By Mangosuthu Buthelezi
Memories of a long brotherhood tempered in common struggle
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