With debt disputes behind us now, attention has turned to the stalling economy and returned risk of recession. Therefore, in response, the Federal Reserve is mulling over the possibility of instating a third round of qualitative easing to help the American and global economies cope.
Many worry that the economy is on the brink of taking a sharp downward turn, and as American consumers cut spending at the fastest in nearly two years, underlying market weakness is only increasing. Furthermore, the U.S. jobs report for July, to be released today, is expected to show the unemployment rate to have remained around 9.2 percent.
Wall Street Journal chief economics correspondent Jon Hilsenrath consulted with three former directors of the central bank’s monetary affairs committee. Donald Kohn, Vincent Reinhart and Brian Madigan put the risk of another economic downturn between 20 and 40 percent.
Madigan, who advises Barclays Capital, along with Kohn agreed that the Fed should consider an additional round of bond purchases if inflation slows and the economy continues to underperform.
Last month, Federal Chairman Ben Bernanke told Congress that he was prepared to act if economic weakness persists, however, that explicitly requires the Fed to witness a risk of deflation.
The two also cautioned that a “QE3” program would not serve as the be-all, end-all cure.
Madigan asserted that the Fed’s last $600 billion bond purchase, which ended in June and attempted to mitigate the tense economy, had an unexceptional, yet positive effect.
More optimistic, Kohn, the Fed’s number two until September of last year, believes the economic slowdown has been the cause of fleeting factors, including high food and gas prices.
He expressed that the Fed is left with “limited” choices currently for how to support the economy. If inflation comes down, however, he strongly believes in the bond-purchasing program.
Finally, Fieinhart, who seems to agree with the majority of Americans in their disenchantment with Congress, believes the end to the debt deal debates has not eliminated the potential for credit ratings to decrease still.
Kohn added that the deal is ambiguous in its fiscal policy such as the payroll tax cut set to end in January, making it more difficult for the Fed to decisively construct monetary policy. If there were explicit guidelines, Madigan believes it would be simpler to decide whether to implement a bond-purchasing program and subsequently estimate its effectiveness.
Surely, Americans are relieved that the government avoided default; yet the former Fed officials remain weary overall.
“…we’re less resilient to adverse shocks,” said Reinhart, who puts the odds of a new recession at around 40%.
The Central Bank will stick it out until August 9, (another 4 days) to see if there is any market turnaround before meeting to assess action-taking options.
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