Tags: Fed | QE | economy | taper

Now It's Up to the President and Congress

Friday, 20 Sep 2013 07:45 AM

By Ed Moy

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The Federal Reserve acknowledged this week what Main Street America already knows: the U.S. economy still needs maximum life support.

The Fed is responsible for monetary policy (managing money supply) and has set targets on the two metrics it has the greatest influence on: employment and inflation.

While employment numbers have improved, it has been because most of the new jobs created have been part time. Also many Americans have stopped looking for work, therefore, making the denominator smaller. That makes the unemployment numbers look better than they really are. And in spite of all the money the quantitative easing (QE) has injected into the economy, inflation remains stubbornly low. Low inflation usually indicates very little economic growth.

Because the Fed has not met its two targets yet, it would seem logical that tapering QE is not going to happen soon. But the Fed is seeing a diminishing positive impact from QE. And the tremendous size of QE also makes it harder to unwind without the risk of high inflation and financial instability. So it has hinted that tapering could start soon as a way to prepare the economy for the eventuality of tapering.

But the hinting is also a plea to President Obama and Congress to get our country's fiscal policy (how the government taxes and spends money) in order because monetary policy alone will not result in the economic growth America needs. And unless spending and taxing priorities change, the economy's performance is not going to change.

That doesn't look likely. There are no easy solutions to the upcoming debt ceiling crisis or getting agreement on the federal budget for the first time in five years. Failure to agree on solutions may result in a possible temporary government shutdown, which would not help our fragile economic recovery. That concerns the Fed.

So expect lots of uncertainty and volatility this fall. In the end, the debt ceiling will have to be raised. And given how far apart the president and Congress are regarding clear fiscal priorities (cut or increase spending and taxes, fund or defund Obamacare), a continuing resolution (carrying forward the prior budget, now five generations old) is more likely than agreeing on a budget is.

All of which means more of the same.

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