US economy bleeds, Fed grasps for solutions

WASHINGTON - As more signs point to a US economy that is sinking fast, the Federal Reserve is struggling to find ways to reignite growth even as confidence wanes among consumers, businesses and banks, analysts say.

By (AFP)

Published: Sat 8 Mar 2008, 9:26 AM

Last updated: Sun 5 Apr 2015, 1:17 PM

As the Fed unveiled a series of efforts to get credit flowing after stunningly weak labor data, some analysts said the central bank’s efforts may have little positive impact and threaten to erode its inflation-fighting credentials.

Recession fears were stoked by Friday’s report that the US economy lost 63,000 jobs in February in a second month of declining employment.

The weaker-than-expected report boosted the odds of another cut in interest rates by the Fed, which has already slashed in federal funds target from 5.25 percent in September to 3.0 percent.

The Labor Department report was released minutes after the Fed announced actions to pump more liquidity into the distressed banking system, which is reeling from a horrific slump in housing and tighter credit, in a further threat to economic growth.

But some say the Fed is losing a grip on efforts to jumpstart the economy.

“Banks don’t need incentive to borrow as much as they need incentive to lend,” said Kevin Giddis, analyst at Morgan Keegan.

“We are in an unprecedented real estate and credit crisis that is whipping its way through the US economy like a midwestern tornado.”

Fred Dickson, a market strategist at DA Davidson & Co. said the rate cuts are failing to help spur economic activity and that the Fed “should stop cutting rates.”

“The rate cuts simply aren’t working and result in putting more pressure on the dollar and oil prices, which is compounding the problems in the credit market and the economy,” Dickson said.

Ethan Harris, economist at Lehman Brothers, said the collapse of the dollar while gold and oil have surged to records are potential inflation indicators that threaten confidence in the Fed, but predicts the central bank will regain the upper hand.

“We believe that loss of confidence will be short lived -- as the economy and commodity markets weaken both actual and expected inflation will likely fall,” Harris said.

Still, Harris said the US will be unable to avert recession because the Fed’s rate cuts and the 168-billion-dollar economic stimulus passed by Congress will take time have an impact.

“We are now penciling in a recession in the first half of 2008 and have trimmed our already very anemic recovery figures,” he said. ”The feeble economy should ease inflation over time.”

Although Friday’s report showed a slight drop in the unemployment rate to 4.8 percent, the labor force available for work fell by 450,000 and the participation rate slipped 0.2 percentage points.

Overall, the report signaled a sharply weaker-than-expected performance for the US economy, which according to analysts needs to add at least 100,000 jobs per month to keep pace with new labor market entrants.

Ahead of the Labor Department announcement, the Fed unveiled two initiatives aimed at easing a growing credit squeeze that would make 200 billion dollars available to the strapped financial market.

The central bank hiked the amounts available in its Term Auction Facility program, in which banks bid for loans, to 100 billion dollars this month. It also launched a series of repurchase transactions expected to reach 100 billion dollars to pump more liquidity into the banking system.

“This was a good news-bad news story,” said Scott Brown, economist at Raymond James & Co. “It’s good the Fed is coming to the rescue, the bad news is that they have to.”

Brown said the main worry is that the economy may enter a downward spiral with “adverse feedback loops” where bad news feeds on itself and causes consumers and businesses to retrench further.

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