Depending on how you read it, it seems as though Fed Chairman Ben Bernanke's speech last week laid out a plan for the Fed to take further action to shore up the recovery if growth forecasts continue to fall. Now the Fed's Beige Book -- an economic assessment taken eight times a year -- has been released, and it doesn't have a lot of good news: Reports suggested "continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods."
Will this be enough reason for the Fed to act? Even with signs of slowing growth -- and growth has been low enough that the economy has not even produced enough jobs to keep up with population expansion -- consumers are paying down more debt, leading to slow increases in consumer spending. You could easily imagine the Fed making the case that this represents slow growth that shouldn't be meddled with or, on the other hand, that forward motion is flagging and the Fed ought to do more.
We can hope that retiring Vice Chairman Donald Kohn's recent comments accurately reflect the consensus within the Federal Open Market Committee that sets monetary policy: "It’s going to be a slower recovery," Kohn says. "But acceptance of that reality is not a reason for the central bank not to do everything it can to help that recovery along.” Unfortunately, Kohn is now retired, and his replacement, Janet Yellen, along with two other nominees to join the Fed Board, Peter Diamond and Sarah Bloom Raskin, wait in Senate limbo.
Time is running out if the president wishes to appoint them during the congressional recess; should he choose not to, they aren't likely to join the institution in time for its next meeting, and the Fed may not adopt a more aggressive posture without more voices arguing that slow growth and deflation are more pressing problems than future inflation. If the Fed doesn't act, it could mean further delay and continued economic stagnation, something the president will have much cause to regret.
-- Tim Fernholz
