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Fed: Possibly 5 or 6 years before sustainable growth
Howard Richman, 7/15/2010

According to minutes of the Federal Reserve's June 22-23 meeting, released on July 14, Federal Reserve officials downgraded the prospects for future U.S. economic growth. Connie Maden reports:

Fed officials expect below normal growth through 2012, and their outlook on unemployment has dipped. They said that it may take as long as five or six years before the economy returns to a longer run sustainable path.

There seems to be little pressure on inflation. The Fed uses the price index for personal consumption expenditures, excluding food and energy, as its main tool. The estimates are for inflation to remain in the 0.9% to 1.2% range.

Growth estimates were lowered to between 3% to 3.5%, down from 3.2% to 3.7%.

At the meeting Federal Reserve officials considered resuming buying long-term bonds or further increasing the money supply. They finally decided to just wait and see what happens. In a Seeking Alpha commentary (Quarterly Forecasts: Slow Growth or Double Dip?), University of Maryland economist Peter Morici notes that they are out of answers:

The Federal Reserve cannot lower short term rates—those are already at near zero levels—and it is doubtful that new purchases of mortgage backed securities would do much. Mortgage rates are already very low. The overhang in the supply of housing requires that any immediate gain in construction and jobs accomplished by further subsidizing housing purchases, through tax credits or Federal Reserve intervention, will only borrow from sales and construction from a quarter or two into the future.

But of course, the reason that they are out of answers is because they have taken off the table the tool that would work. Morici continues:

The Treasury has forsaken the third tool of monetary policy—exchange rates—by letting Beijing enforce an undervalued yuan.

The trade deficit is a huge drag on the U.S. economy—creating a growing hole in aggregated demand. It is a primary reason, along with the Administration’s lack of comprehensive action to address the woes of the 8000 regional banks, the economy cannot accomplish growth of 4 or 5 percent, as it should when emerging from a recession.

What Morici says of the Treasury is also true of the Fed, who can buy foreign currencies on their own account without need of approval of the U.S. Treasury. Moreover, the Fed could speak out for balanced trade in order to bring about Congressional action. Congress could easily balance trade by enacting a tariff directed at the currency-manipulating countries, such as the tariff scaled to our trade deficits proposed by my father, son and I.

The incompetence of the Fed and the Obama administration is breathtaking. How many more years of depression must our economy suffer through before they finally start to use the tool that would work?

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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