All skeptical eyes on the Fed this week as the FOMC meets
As members of the Federal Reserve Board attend the Federal Open Market Committee Tuesday and Wednesday to discuss interest rates and the final two weeks of quantitative easing under QE2, economists are busy guessing what the Fed will or will not say about economic stimulus going forward. "I think the main topic of consideration will be what do the weak growth indicators for the second-quarter mean, and how do they reflect that in their conduct of monetary policy," Doug Duncan, chief economist for Fannie Mae, said in an interview with HousingWire. "It would be interesting to see whether the recent weakness for the second quarter alters any of their public statements, and if they give any indication of changes in regards to ending the Treasury repurchase program ... or whether they make a comment on the reinvestment of maturing mortgage-backed securities back into Treasurys." Of particular concern is the anemic housing market, which has failed to respond to record-low home prices and interest rates, pointed out University of Texas at Arlington economist Roger Meiners. "I am guessing they are not going to change anything," Meiners said. "Interest rates appear to be stable, and the so-called stimulus is probably likely to continue. Nobody else is going to buy all of the Treasury debt, except for the Fed. The massive deficits continue and that paper has to be pedaled to someone." "It's going to be stay the course," Meiners said, when predicting the Fed's course of action. "They have gotten themselves into a trap. They are afraid if they raise interest rates it will quash the minimal growth that we already have. In real estate, the low interest rates are not doing a lot to stimulate demand. You have a massive backlog of unsold property, and it will take a couple of years to clear that out." Meiners not only predicts a stay-the-course action by the Fed, he said the FOMC board members are stuck between a rock and a hard place, with true unemployment — counting those who have quit searching for work — hovering near 14%. "It's a long-term liquidity trap," he said. "It doesn't matter how low you cut the interest rate. No one is interested in grabbing the money. The Fed has been pumping money into the system. We have seen interest rates drop a little bit. Nobody is too anxious to borrow, and the banks are not anxious to lend." Analysts are increasingly skeptical of the idea that the Fed will deliver the nation back to a period of equilibrium anytime soon. "While stimulative monetary policy is an appropriate cure for short-term cyclical declines in domestic demand, there are a wide range of economic problems that cannot be corrected by monetary policy," said Richard Alford in an article published by Institutional Risk Analytics. Due to external supply-driven issues including disinflation and unemployment dating to the mid-1990s, "U.S. policymakers should have pursued policies that promoted structural adjustments. Instead, the policymakers pursued expansionary counter-cyclical policies." "Unfortunately, U.S. policymakers are again pursuing the same inappropriate stimulative policies and continue to ignore the underlying structural problems," Alford said. "Policymakers continue to act and economic pundits continue to talk as if U.S. inflation and output are determined by domestic factors only. The only policies that have been implemented or even proposed have been the tools of counter-cyclical domestic aggregate demand management which cannot successfully cure problems that have roots in external structural supply shifts." Write to: Kerri Panchuk.