With the U.S. economy flatlining and at risk of falling into a new recession, the Federal Reserve lacks good tools to do much of anything about it — though that won’t necessarily stop the central bank from trying.
The Fed has a policy of ultra-low interest rates and other unconventional steps already in place to pump up the economy. But the central bank has declined to take any new actions to try to further loosen monetary policy this year, amid projections that economic growth will rebound in the second half of the year. But the most recent data has made those predictions look more doubtful.
Chairman Ben S. Bernanke and his colleagues do have options to try to address a new wave of weakness evident in recent data. It’s just that the tools that remain are either not particularly powerful or could exacerbate rising prices that have already pinched Americans this year — or both.
The Fed is holding its regular meeting on monetary policy next week, and leaders of the central bank will surely discuss the weakening outlook, whether they should do anything in response and what such a response might consist of. Their public statement following the meeting will likely reflect the worsening outlook for the economy, but they appear inclined not to make any policy changes until more evidence has become available and there has been more time to weigh it.
That discussion will take on particular urgency if a report on the job market Friday is particularly atrocious, which would be the third-straight month of disappointing job creation.
The Fed will be particularly attentive to any evidence that the weaker economy is pushing down prices across the economy. The central bank is more likely to take action if there is a risk of falling prices — or at least prices rising well below the central bank’s unofficial target of about 2 percent — than if inflation seems set to continue on the uncomfortably high trajectory it has been on through the first half of the year.
A slew of economic data in recent days has pointed to a flatlining of economic growth in the United States — and much of the world — as summer began. The most recent was a report Tuesday that personal consumption spending fell in June for the first time in almost two years. That followed the release of a key manufacturing survey Monday showing that the expansion in the nation’s factories came nearly to a halt in July, and gross domestic product data Friday that showed the economy grew at less than a 1 percent annual rate in the first half of the year.
The basic challenge for the Fed is this: It is charged by Congress with maintaining stable prices and maximum employment. But when those goals are in conflict with each other, that makes it hard to decide what to do. And right now, the nation seems to be losing ground on jobs, adding them too slowly to reduce unemployment. Yet prices are rising at about the 2 percent or so annual pace that the Fed considers to be stable. Anything the Fed does to try to address the weak job market may well cause inflation to rise above its leaders’ comfort level.
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