Too Late For The Fed To Prevent Recession

Markets rose yesterday, to some extent on a belief that the Federal Reserve would try to boost the economy through a third round of quantitative easing. This has become known as QE3, a reprise of the QE2 program whose effects may have begun to be felt earlier this year. It won’t work this time. The economy is already too far gone.

The QE2 program was put into place in very late 2010. The Fed bought U.S. sovereign debt to keep down interest rates. The plan may have worked. It is hard to say because during the same time investors moved into Treasuries as safe havens because of, among other things, a liquidity and credit crisis in Europe.

Whatever the impact, the Fed began its purchases in a period when the U.S. economy was mustering strength. Unemployment improved through most of the first five month of this year. Consumer confidence moved higher, as did business activity. Some of this may have been due to extension of the Bush tax cuts. There were too many “economy improvement” plans in place to say that any one was the most essential.

The economy began to slow some time in the spring, and has gotten worse since. There is a fear that U.S. GDP did not improve at all in July. Consumer confidence has plunged. PMI data show trouble in the business sector. Employment numbers have worsened. Housing has never recovered and continues to deteriorate.

The malaise that has settled into the American economy is not likely to be countered by a new Fed bond buying program. Most interest rates are already low. That has not sent Americans back to stores or into the housing market. The Fed cannot fix high gas prices. The steady erosion in jobs is driven now as much by government austerity as a timid private sector.

The ship that is the U.S. economy has sailed for the second half with most of the factors that have crippled it already on board. QE3 won’t reverse that.

Douglas A. McIntyre