Anyone looking for a glimmer of economic hope from the Federal Reserve Board had to be sorely disappointed by the comments of Chairman Ben Bernanke following the two-day meeting of the Open Market Committee.
Sam Stovall, chief equity strategist at S&P Capital IQ, put it best when he explained that the Fed's action indicates "the patient does not need another defibrillator jolt, but it does need to be hooked up to the IV a bit longer."
Key to the Fed action was the decision to extend Operation Twist. The program, scheduled to conclude at the end of this month, authorizes the purchase of longer-term Treasury securities to bring down interest rates and "make broader financial conditions more accommodative."
The program will be extended through the end of this year and further if conditions require more action to avoid a return to recession. However, not all observers believe this will provide the intended results.
"The ultra-low interest rates induced by the Fed have served to artificially perpetuate unsustainable economic growth," said economist Kelly Cunningham of the San Diego-based National University System Institute for Policy Research. "We continue to have an economy based on too little savings and production, and too much borrowing and consumption. Government bailouts and efforts to subsidize targeted industry sectors meant less available for more productive sectors now."
But the Fed believes its policies are working, albeit at a slower than desired pace. The statement following this week's meeting acknowledged that while the unemployment rate remains elevated, there are signs of improvement.
"Business fixed investment has continued to advance," according to the Fed statement. "Housing spending appears to be rising at a somewhat slower pace than earlier in the year. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline."
Bernanke continues to focus, appropriately so, on employment trends. The Fed statement provided a reminder of the board's statutory mandate to foster maximum employment and price stability.
New job creation in recent months has slowed to levels well below those needed for economic growth and expansion of the gross domestic product. For some observers, that does not come as a surprise.
"Companies remain cautious and reluctant to increase hiring or capital spending," said Lynn Reaser, chief economist at the Fermanian Business & Economic Institute at Point Loma Nazarene University. "Too many uncertainties exist regarding health care reform, tax increases, changes in various regulations and budget cuts."
But even with the lack of job creation and global stresses, the Conference Board's index of leading economic indicators — a forecasting tool for activity over the next six to nine months — increased in the report released on Thursday.
"Economic data in general reflect a U.S. economy that is growing modestly, neither losing nor gaining momentum," said Ken Goldstein, economist at the Conference Board. "The result is more of a muddle-through. Continued headwinds, both domestic and foreign, make further strengthening of the economy difficult."
It is unlikely the Fed will take any significant action for the rest of the year as the November elections approach, although Bernanke made it clear that steps to protect the economy will be taken if warranted.
But the coming "fiscal cliff" — the combination of tax increases and spending cuts that could kick in at the end of the year — will require attention sooner rather than later to avoid dramatic moves in the financial markets.
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