With the announcement today that the overnight federal funds rate will be cut close to zero, the Federal Reserve has effectively joined the Looney Tunes chorus: “That’s all folks.” There is now no effective room to maneuver through monetary policy — short of printing money.
The Fed’s release states that, “Since the Committee’s last meeting [on October 29], labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined.” Job losses are accelerating, which will only make the consumption picture worse in the months to come.
Employment has fallen for 10 months in a row and we’ve lost 1.3 million jobs in the past three months alone. The most recent GDP figures show that consumer spending dropped by an annualized rate of 3.1 percent — the largest decrease since the second quarter of 1980. And we’ve known about the atrocious business investment figures since the release of second quarter data in September.
Policy makers have two sets of tools to stimulate the economy: monetary and fiscal policy. Although the markets responded positively, today’s news is proof once again that the Bush administration has put all its eggs in one basket. The need for an economic recovery package aimed at creating jobs has been evident for months, but both President Bush and Senate Republicans have repeatedly blocked attempts to pass a package.
While the House passed a $60 billion package in September, Bush threatened a veto and the Senate never voted on the issue. Now, $60 billion seems paltry compared to the problems at hand, and economists are suggesting something closer to $600 billion will be necessary to get the economy back on track.
In any case, it is not clear that the Fed’s final throw of the dice will have any impact on the housing market. A few credit worthy individuals may see an opportunity to refinance into a lower rate. But the Fed’s Senior Loan Officer Survey shows credit remains tight across the board. Those already facing foreclosure or mounting credit card debts are unlikely to feel any real benefit. To get serious about the housing crisis, we need to refocus the Troubled Assets Relief Program (TARP) on buying up mortgage-backed assets as the Center for American Progress proposed last month.
By ploughing ahead without any clear foundation to its policy, the administration is looking more and more like Wile E. Coyote.