What Should the Fed Do Tuesday?

By Daniel Indiviglio

In August, the Federal Reserve announced a significant policy change when it decided to reinvest the proceeds of its maturing assets in longer-term securities. On Tuesday, the Federal Open Market Committee (FOMC) meets again to discuss further changes to monetary policy. This is the committee's last scheduled meeting until November, so this is also its last chance for six weeks to revise its policy. What should it do?

To best address this question, it might be helpful to consider the new data that the FOMC will have to look at since its last meeting on August 10th. Here are some highlights of what we have learned since then:

The Good

The Bad

The Mixed

  • Unemployment rose slightly, while private sector jobs grew slowly in August
  • The trade gap swelled in June, but shrunk in July
  • Consumer credit declined again in July

There are a few immediate observations here. First, most bad and mixed signals above are from July or earlier. Negative indicators for August include auto sales, consumer spending, and foreclosures. Meanwhile, the jobs picture has been very disappointing, but the private sector is growing very slowly -- not contracting. Although both consumer confidence and retail sales improved in August, the progress was mild.

How to interpret these signs is, of course, something of a subjective exercise. I believe that they indicate that the economy is in a painfully slow recovery, but not yet sliding into a double dip. While I continue to fear that as a possibility, the data above indicates that there was no significant deterioration in August. Consequently, there isn't any reason for extreme measures being taken by the Fed at this time. Instead, it should stay the course. The meeting should be used to continue to hone its tools for both additional monetary stimulus and exit, in case either becomes suddenly necessary.

But what do you think? Take the poll below on what the Fed should do. (Based on these options.)


This article available online at:

http://www.theatlantic.com/business/archive/2010/09/what-should-the-fed-do-tuesday/63261/