Gail MarksJarvis: Fed leader hints at continued stimulus

McClatchy-Tribune Information Services

August 31, 2015

Can you count on Federal Reserve governors to cradle you in their arms and make everything OK in the economy and stock market?

Powerful Fed leader William Dudley on Wednesday sounded like the Fed might give it a try. With increasing weakness in the global economy threatening to drag down the U.S., Dudley said he is less inclined now to consider a September interest rate increase than he was before.

In Fed speak, Federal Reserve Bank of New York President Dudley said the idea of raising rates in September is "less compelling" than it was just a few weeks ago, although he said improving economic data could change that perspective.

Until the stock market started cratering last week, economists had widely expected the Federal Reserve to stop coddling the economy and investors with ultra-low interest rates. The Fed has used a zero-interest-rate policy to nurse the economy into better health since the 2008-09 financial crisis.

But the Fedís low rates have been controversial. Some analysts have claimed that continued low rates are essential for the global economy because it never got its bearings after the financial crisis. Others have criticized the Fed for waiting too long to lift rates. Although low rates are supposed to generate growth in the economy by making homebuying and business expansion affordable with low-interest loans, the economy hasnít expanded as intended. Itís been growing but continually has fallen short of the Fedís expectations.

Instead of generating strong growth, critics claim low rates have made savings accounts and other safe investment choices unbearable for retirees and institutions like pension funds that need to earn interest. And by starving people and institutions for interest, the Fed and central banks in Europe and other parts of the globe have driven investors throughout the world to take chances they otherwise would not.

After the financial crisis, Fed governors said it was their intent to drive people to take more risks so that investing in stocks and riskier bonds would help lift the economy from depressed levels. But critics claim the move went too far, with stocks soaring over 200 percent since early 2009, despite companies generating little sales growth in a lackluster global economy. Fed critics also have worried that junk bonds, emerging market debt, real estate worldwide and even art and wine soared to ridiculous levels as investors looked for a place to grow their wealth. The result: Investors are vulnerable because overly pricey investments eventually fall.

Further, since people become nervous about spending money when they lose a lot of money on investments, or if they fear they might lose their jobs, a stock market plunge could cause a setback for the economy as well as investors. During the last month, investors have lost $2 trillion in the full U.S. stock market, measured by the Wilshire 5000. It would have been worse if not for a powerful rally Wednesday. The Dow Jones industrial average gained 619 points but remains down 8.6 percent for the year ó an improvement from the 11 percent downturn before Wednesdayís rally. The Standard & Poorís 500 is down 5.75 percent for the year.

The Federal Reserve is not required to prop up the stock market. But Dudley mentioned a connection between the stock market and the global economy. With stocks falling, he noted that he would be watching to see if consumer confidence suffers. If it does, and people feel compelled to save money rather than spend it, the economy could slow.

Many analysts have been sending notes to clients during the last few days telling people that there was nothing to worry about in the U.S. economy because consumers are extremely confident about the future, homebuying has been improving, and other economic data has been reassuring.

Dudley noted Wednesday that recent economic data have been positive. But he added that the data thatís been released the last few days are already outdated because they measured a period that preceded the recent international concerns.

On Friday, he said, he will watch for the first hint at what international concerns and the stock market plunge have done to consumersí willingness to spend. He will examine the University of Michiganís consumer confidence survey.

Outside of the Fed, some economists continue to see risks for the economy. Joel Prakken, senior managing director of Macroeconomic Advisers, told economists on a National Association for Business Economics conference call Tuesday that heís expecting global trauma to weigh on the U.S. economy this year and into 2017. Heís not expecting a recession, but he said that if the Federal Reserve doesnít continue to keep interest rates at zero, the unemployment rate could be at 5.5 percent in 2017 compared to 5.3 percent in July and inflation will still be disturbingly low. Even with the Fedís continued stimulus, he expects the economy to stay bogged down by the global drag.