Fed Falls Further Behind the Curve as Economy Weakens
Posted by Michael A. Kamperman on April 30, 2009
Yesterday the Federal Reserve Board of Governors decided to stand pat rather than up the pace of quantitative easing. Today we learned the economy has weakened further. Weekly jobless claims remained above 600,000. More troubling was the drop in both personal income and personal spending in the month of March by the consumer. One of the stronger parts of the -6.1 GDP report was consumer spending. This was based on strong spending by the consumer in the month of January. By March the consumer weakened considerably. With unemployment rates continuing to rise and wages beginning to fall it seems unrealistic that the consumer will continue to be able to prop up the economy. Yet many analysts believe the consumer potentially will lead the economy up in the second half of the year. Chrysler has been placed into bankruptcy by the U.S. government and more job losses in the auto industry on the way. It is hard to imagine the U.S. consumer will pick up the pace of spending any time soon.
Additionally, many Mexican nationals shop in the states on the southern border. Mexico is the number two destination in the world for U.S. exports behind Canada. Swine flu has shut all of the schools and many essential government services in Mexico. The usually bustling streets of Mexico are deserted. Even if a pandemic is not declared for swine flu the economic impact on Mexico is devastating. Trips to Mexican tourist destinations are being cancelled left and right. The economic weakness in Mexico will be felt in the U.S.
The reason the U.S. economy remain moribund is the non-government backed asset-backed securities market remains closed. This loss of credit to the economy has not been replaced. The Treasury mistakenly believes these markets are frozen. They are not frozen. They are broken. Until they are fixed, or an alternative source of credit for businesses and consumers emerges, the economy will continue to slide. The Fed’s own internal study says the Fed Funds rate needs to be 5% lower right now and quantitative easing is the only way to achieve this since rates are near zero. Either helicopter Ben has cold feet or he is having trouble bringing along some Fed Governors who are still fighting the economic battles of the 1970’s rather than the economic battles of the 1930’s.
