Economists: Fed action will have minor impact

Economists say Ben Bernanke and the Fed might not be able to do much to lift the economy and urge lawmakers like US Representative Paul Ryan to take action.
Jim Watson/AFP/Getty Images; Jacquelyn Martin/Associated Press
Economists say Ben Bernanke and the Fed might not be able to do much to lift the economy and urge lawmakers like US Representative Paul Ryan to take action.

Eric Rosengren, president of the Federal Reserve Bank of Boston, has taken an unusually public and strong stand in urging his fellow policy makers at the Federal Reserve to take additional actions to strengthen the US economy. But even if the central bankers follow his advice, it would have minimal impact, analysts said.

The Fed has already cut its benchmark short-term rate to near zero and helped push long-term rates, such as for mortgages, to record lows. So the amount of additional stimulus the Fed can add to the sluggish economy is limited, economists said.

“I’m skeptical that monetary policy actions at this point will have a major effect,” said a Harvard University economics professor, Benjamin M. Friedman. “In my judgment, the effects would be relatively small.”


That isn’t necessarily to say that economists believe the Fed should do nothing. Many say a move by the Fed could be psychologically important, providing a boost to confidence in the face of mounting uncertainty. US employers have been wary of hiring workers due to concerns about worsening economic problems in Europe and the possibility of deep budget cuts and tax increases if the polarized Congress fails to act before the end of the year.

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With the economy fragile and under pressure, any additional support might help, said Brian Bethune, an economics professor at Gordon College in Wenham. Last month, the national unemployment rate rose to 8.3 percent from 8.2 percent in June.

“We’re in this zone of vulnerability,” Bethune said. “It’s the bicycle principal: If it slows down enough, it falls over. This is what I’m sure Rosengren is concerned about.”

Rosengren has proposed that Fed policy makers bring down mortgages rates further by buying mortgage securities. Ideally, such a move would push the already low cost of home loans even lower, providing more incentive for people to buy homes, giving the real estate market a lift.

It’s similar to strategies the Fed deployed earlier to drive down long-term interest rates, despite criticism from some Fed officials and Republicans that such policies could ignite a burst of inflation in the future.


Nigel Gault, chief US economist at IHS Globe Insight, a Lexington forecasting firm, said Rosengren’s proposals miss the mark. The problem is not that interest rates are too high — they’re at record lows — but that too few people can qualify for loans as banks maintain tighter credit policies.

“My worry is that they [the Fed] want to give the impression that they can do an awful lot and really have a big impact,” Gault said, “but maybe the tools they’ve got are just not effective at this point.”

Catherine Mann, an economics professor at Brandeis University and member of an advisory panel at the Federal Reserve Bank of Boston, said the Fed must find new ways to influence bank lending. Banks have to be willing to refinance mortgages, she said, even if homeowners are underwater — that is the value of their homes fell below what they owe on mortgages as result of the housing crash.

Mann said the Federal Reserve should also buy Small Business Administration loans, which are made by banks but guaranteed by the federal government. Such a move would free more money for banks to make the loans, potentially helping more companies obtain the credit they need to expand and hire.

“The housing market is a real problem, but we’ve done a lot to aid it,” she said. “It seems to me like it’s time to focus on an alternative avenue to creating jobs.”


But there are signs that credit is becoming easier to obtain. A Fed survey of senior bank loan officers in July found that many had eased lending standards for most loan types in the last three months. Many reported an increase in demand for prime mortgages and auto loans. Lending policies for US businesses generally eased over the period, as well, and demand increased somewhat, according to the survey.

Still, said Harvard’s Friedman, it’s “clear the US economy needs more stimulus.” But that stimulus should come from Congress, he said.

Congress is deadlocked on how to resolve differences over spending and taxes. The Bush-era tax cuts are scheduled to expire at the end of the year, and deep, across-the-board budget cuts will go into effect in January unless compromises are reached.

But little progress has been made, and the uncertainty of the so-called fiscal cliff has weighed on hiring and the broader economy, analysts say.

“It’s unfortunate these are coming up during a presidential election and a political climate that’s not conducive for addressing this important economic issue,” Friedman said. “Everybody understands that the impasse over fiscal policy is having a damaging effect on the economy. I don’t think there’s any disagreement about that.”

Megan Woolhouse
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