"The Fed is largely out of bullets"

The mistake being made should be obvious. The focus on consumer demand is not working. Neither is the deficit spending to save government jobs.

Every government job saved or created takes away from the private sector in the form of taxes or federal borrowing. Creating consumer demand is a good policy if we are trying to stimulate China. China exports more to the US and the spending is created by borrowing more money from China.

Policy should be job creation in the private sector. That can be done by doing less: less regulation, less taxes and less government meddling.

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Aug. 8, 2010, 7:00 p.m. EDT
Fed may resist market pressure for bond buys
Will seek to jawbone market that it is alert to downside risks

By Greg Robb, MarketWatch
WASHINGTON (MarketWatch)

Confronted with a U.S. economy that appears to be decelerating, the Federal Reserve may ratchet up cautionary language but many expect the central bank will refrain from buying more bonds to bolster growth.

"I am sure they are going to do nothing," said Bill Cheney, chief economist at John Hancock in Boston.

"The whole question" will surround the language of the statement, he said, where the central bank will want to stress it is "on the job and aware of downside potential," Cheney said.

The Federal Reserve is due to announce its decision from its one-day meeting on Tuesday at 2:15 p.m. Eastern.

The pace of the recovery has been slowing, putting pressure on the Fed to act to ward off a double-dip recession and falling consumer prices known as deflation.

Gross domestic product grew at a 2.4% annual rate in the second quarter, down from a 3.7% rate in the first three months of the year. The labor market seems stuck in second gear with the private sector adding fewer than 100,000 jobs per month since May. See full story.

After the weak job report for July on Friday, pressure for the Fed to take action mounted in financial markets, said John Canally, economist at LPL Financial Corp. in Boston. Economists at Goldman Sachs said Friday they expect the central bank to reinvest the income from mortgage-backed securities it holds back into the bond market - a "baby step," in their words, in the direction of unconventional easing.

But many Fed watchers believe the Fed is still forecasting a slower expansion rather than new danger emerging.

"I don't know they are really prepared to panic about this," said James Glassman, economist at J.P. Morgan Chase.

Many analysts said the July job data did not seal the deal for an easing.

Last month, Federal Reserve Board Chairman Ben Bernanke stressed the central bank was "ready" to take further steps to stimulate the U.S. economy if growth turns out to be weaker than expected.

"We are ready and we will act if the economy does not continue to improve -- if we don't see the kind of improvements in the labor market that we are hoping for and expecting," Bernanke told Congress.

Bernanke listed the options he said that the Fed is open to considering.

• The first option would be to signal to markets that rates are on hold for a very-long "extended period."
• The second would be to reduce the interest rate on excess reserves.
• And the final option would be adjusting the balance sheet by not letting maturing housing-related securities run off.

"That may sound good but the Fed is largely out of bullets," said Joel Naroff, president of Naroff Economic Advisers.

Many analysts are not impressed with these options and argue the Fed is about out of ammunition, with interest rates barely above zero and having bought $1.7 trillion in housing-related assets.

"It does feel the Fed is at point of pushing on a string. They can pump out more money but all that does is pump up bank reserves," Cheney said.

"If low interest rates were going to get the economy humming it would be humming already," Cheney said.

Some economists said the Fed will not reach a consensus on Tuesday.

"I would be surprised if they make up their mind what to do yet," said Glassman.