Federal Reserve, Pessimistic About Economic Growth

by Don Azarias
August 1, 2011
Forget about those so-called top economists and analysts who, time and time again, render educated opinions and guesses about the nation’s economy. Ladies and gentlemen, the moment of truth has arrived. We now have to listen to the gospel of the true economic guru of them all, the real McCoy——Ben Bernanke, the scholarly chairman of the Federal Reserve, the nation’s central bank. He has grown more pessimistic about the state of the U.S. economy. For all his credentials and authority to speak on this matter, I think it’s only fair that we consider Bernanke’s pronouncement as the Bible. 

 According to the Associated Press (AP), Bernanke and Federal Reserve officials are more pessimistic about prospects for economic growth and employment than they were two months ago. In an updated forecast, the Fed estimated that the economy will grow between 2.7 percent and 2.9 percent this year. That’s down from its April estimate of between 3.1 percent and 3.3 percent. The downgraded revision is an acknowledgement that the economy has slowed, in part because consumers have been squeezed by higher gasoline prices and supply disruptions from Japan’s disasters. However, the Fed feels that these problems are temporary and that the economy will rebound. With unemployment now at 9.1 percent, the Fed estimates that unemployment will still be around 8.6 percent to 8.9 percent by the end of the year. The Fed acknowledged that the economy is growing more slowly than it expected. It will also complete its $600 billion Treasury bond buying program as planned. The Fed repeated a pledge to keep interest rates at record lows near zero for “an extended period,” a promise it has made for more than two years. But the controversial program is widely believed to have been of limited help to the economy.

 The Fed is predicting that inflation will rise 2.5 percent to 2.7 percent this year, as measured by a price gauge tied to consumer spending. That compares with an April forecast that showed a higher upper range of 2.8 percent. The Fed estimates that “core” inflation, which excludes energy and food, will increase 1.5 percent to 1.8 percent. That’s slightly higher than its April forecast of an increase of 1.3 percent to 1.6 percent. It also issued new economic projections that call for slower economic growth, higher unemployment and higher inflation in 2011 and 2012 than in its previous forecast. But Bernanke said he and other Fed policymakers aren’t certain how much of the weakness is due to those temporary factors and how much is due to longer-lasting problems.

 Furthermore, Bernanke said continued problems in the housing market, excess private sector debt and weakness in the financial sector might be more serious than previously thought. And he suggested the labor market is a long way from being healed. “We project unemployment to come down very painfully and slowly,” he said. “We’re still some years away from full employment of 5.5%. That’s very frustrating.” He said that a default by the Greek government on its debt could be such a shock. While U.S. banks have limited exposure to Greek sovereign debt, they do have significant exposure to European banks that would themselves be affected by such a default. “The impact on the United States would be quite significant.” 

There is also no denying that the economic slowdown resulted in just 54,000 jobs created in May, far fewer than in the previous two months. Though Bernanke and the Fed have acknowledged that inflation has risen, they are confident that it’s going away sooner rather than later. However, the possibility of China’s move to tame its own inflation, that will slow down its booming economy, could result in the reduction of American exports and could hurt the U.S. economy even more.

The Great Recession has caused the loss of 493,000 government jobs as states, counties and municipalities started laying off employees. Now they have to keep on tightening their belt with expected cuts in Federal government’s assistance.

Normally, housing and construction would fuel a recovery. Lower interest rates would draw homebuyers into the housing market that would trigger builders to hire construction workers. It is not the case this time. Home prices are continuing to fall as banks dump foreclosed homes on the market with homeowners’ equity smaller if not completely gone.

The Fed has kept rates at near zero since December 2008. For the readers’ information, the Fed rate is used as a benchmark for a wide range of business and consumer borrowing. It’s commonly accepted, in the business world, that low rates also tend to rally the price of stocks. Lower rates make stocks more attractive to investors and also help keep mortgage rates at record lows. The average rate on a 30-year mortgage has gone down to 4.5 per cent as recently as the week before. Still, low rates have done little to boost home sales, which fell in May to the lowest level in since November. Critics, including some Fed officials, saw things differently. They warned that by pumping so much money into the economy, the Fed increased the risks of high inflation later.

There’s one thing that’s undeniable: Like the Fed, majority of the Americans are also getting pessimistic about where the country is headed under President Barack Obama’s leadership. Opinions about the sad state of the U.S. economy are pointing, adversely, to Obama and the Democrats. Recent polls showed the public’s unfavorable opinion over his handling of the economy particularly the unemployment rate. Add widespread public disapproval with regard to Obama’s handling of health care and the federal budget deficit and you can see the reason why Obama and the Democratic Party are worried about their chances in the 2012 elections. 

The poll shows that four out of five people now believe the economy is in poor shape. Bernanke cautioned that the economic slowdown, including a depressed housing market, could persist into next year. Bernanke said the Fed believes growth will pick up going into 2012 but at a slower pace than expected. Personally, I think Bernanke is being overly optimistic on his prediction.

The president’s team is, no doubt, concerned about his re-election prospects. Obama’s overall approval rating fell to 52 percent in the new poll. It dropped primarily among women. He also lost support among self-described independents, from 62 percent approval last month to 43 percent now, his lowest since June 2010. And respondents who say Obama deserves re-election have fallen below 50 percent. Economic concerns have made people forget his brief moment of glory after the death of Osama bin Laden. There’s no doubt that the economic crisis and Obama’s plan to cut Social Security and Medicare benefits as a bargaining chip against Republicans on the debt ceiling issue are pulling his numbers down.

 It behooves all retirees and senior citizens to stand up to Obama in order to defeat his plan of cutting their Social Security checks and Medicare health insurance benefits. Why should they allow that to happen? Those seniors have paid their dues and contributed to the system. Those benefits came from the sweat of those seniors’ brows. The Social Security and Medicare benefits are not like those outright entitlements for those undeserving people created by politicians for their own personal gain. And for Obama and his Democratic allies to cut those meager benefits for seniors would be a travesty.  
 And now, with its stellar triple A credit rating facing a possible downgrade, what’s next in store for the United States? Only those political leaders in the nation’s capital who are responsible for the country’s financial morass can answer that. It’s because we, the American voters, are allowing those knuckleheads to play politics at the expense of this great country and its people.

 It’s about time we start exercising our prerogative by voting all those bad ones out of office come 2012. There will be no sacred cows and that includes Obama.
I think it’s only fair that we do that. Don’t you think?

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