Federal Reserve & Interest Rates

Federal Reserve Vice Chairman Donald Kohn gave his views on the current economic outlook in a speech on Tuesday.

In broad terms, the data that we have in hand indicate that economic activity turned up in the third quarter. To some extent, the pickup in activity in recent months reflects the dissipation of some of the forces that had been exerting downward pressure on the economy during the preceding several quarters.

Perhaps the most important of these downward forces was the turmoil in financial markets that began in late 2007, which not only tightened credit availability and reduced wealth, but also undermined confidence, especially when conditions took a decided turn for the worse in the fall of 2008.

The stabilization, and more recently the improvement, in risk appetites and financial conditions, in part responding to actions by the Federal Reserve and other authorities, has been a critical factor in allowing the economy to begin to move higher after a very deep recession.

Although the financial system has stabilized somewhat, credit has remained tighter than they would wish.  The Fed still has extensive excess bank reserves on deposit but as economic conditions improve, it is hoped that institutions will lend more freely.

The labor market is still a hurdle that the economy has to get through and while job losses are slowing, the downward trend is expected to continue for a few more months and it could take years for it to fully recover.  Many economists feel that the unemployment rate could remain above 9% mark into 2011.

The housing market also remains a problem for the economy but hopefully as credit conditions improve, that will translate into increased sales activity.  Consumer spending will also likely remain somewhat muted until labor conditions start improving once again but demand has picked up in the past few months.

A lot of people are starting to see the light at the end of the tunnel and hopefully in the months ahead, this view will be re-enforced.

With the deadline for filing taxes coming up next week, not too long after that the first of the new stimulus checks will be going out to millions of Americans.  Consumer spending numbers will receive a much needed boost in the upcoming months.

However once that little jump is over like it was last year, economist will carefully watch those numbers in the fall up to the start of the next holiday shopping season.  Like last year the worsening  unemployment rate is also a major concern.

The unemployment situation plays a major part of consumer confidence and while financial markets may have improved by then the job market is expected to be weak for the rest of the year.  There is also the fact that while interest rates are low right now, there is less available consumer credit than there has been in years past.

There are also many conflicting views on how far off a recovery may be, there are some that feel that it’s just around the corner while some feel that it’s at least a year away minimum.  I’m of the feeling that we still have a ways to go, the housing market is still pretty much in shambles and while we have historically low mortgage rates at the moment, the credit situation hasn’t improved enough for the housing market to take full advantage, although it should hopefully put a brake somewhat on foreclosures as a record numbers of Americans refinance their existing mortgages.

The government’s plan to deal with the banking system’s toxic assets is still taking shape and it will be awhile before we can judge whether it will be successful or not.  Even so the most important thing the government can do right now is to keep any major systemic disruptions from affecting the economy for the near future.

On Friday, the Labor Department released it’s February jobs report and confirmed what many economists were expecting, a worsening employment picture.  The economy has lost jobs now in every month since the recession began in December of 2007.

Nonfarm payroll employment continued to fall sharply in February (-651,000), and the unemployment rate rose from 7.6 to 8.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.  Payroll employment has declined by 2.6 million in the past 4 months.  In February, job losses were large and widespread across nearly all major industry sectors. 

The recession is quickly spreading through all sectors of the economy and at this point even the new $787 billion stimulus package, that is estimated will create up to 3 million jobs in the next few years, seems woefully inadequate to cope with the torrent of job losses that has occurred in the last 4 months.  With no sign of recovery anytime soon, the rate of job losses isn’t expected to slow and many people are wondering how long it will be until the unemployment rate hits double figures. 

The situation would have been much worse if the government hadn’t intervened in the near collapse of the auto industry.  Economists have estimated that a collapse of the auto industry would have cost the economy a minimum of a million jobs in the first few months alone and possibly up to a million more in the other industries that depended on it for revenue.

The financial system is still on shaky ground and the housing situation looks equally as bleak.  With a lack of confidence in the economy, Americans have cut back on spending sharply and the effect is being felt across many industries.

We saw spending buoyed last year once the stimulus checks went out and the same will likely be the case this year.  However, the economy is worse off than it was last year and many economist believe it will have a smaller impact even though the stimulus checks will be larger this year.