Money and Jobs
March 8, 2008; Page A8
These columns have been tough on the Federal Reserve in recent years, but yesterday's action to provide more liquidity to stressed credit markets counts as a helpful step. Considering the lousy February jobs report, we'll take any good news we can.
Early yesterday, the Fed announced it would increase the size of its Term Auction Facility to $100 billion, as well as initiate a series of repurchase agreements with dealers and financial institutions. Both measures are designed to calm the nerves of financial players who have had another stressed-out week. The auction facility was launched in December and has worked better than the discount window as a source of funds for banks in need of short-term money.
The auctions will continue for at least six months, which may well be needed considering that we are now nearly nine months into this credit unraveling with few signs of an end. With no one sure how large mortgage and credit-derivative losses will be, or even where they are located, banks don't want to take any lending risks. This week's main trauma was margin calls on Carlyle Capital, which seems to have caught everyone by surprise.
We'd also credit the Fed for resisting the temptation for another emergency cut in the fed funds rate. That might well have been a temptation after yesterday's jobs report, and the easy money lobby on Wall Street continues in full cry. But monetary policy is a blunderbuss weapon to fire at the solvency worries of a credit crisis, all the more so given the undeniable signs of inflation.
The markets are nonetheless anticipating a further 50 to 100 basis point cut in the fed funds rate at the Fed's regular open-market meeting later this month. The February jobs report will only add to the political pressure on the Fed to do so. There wasn't much good in the report, with overall job losses of 63,000 for the month, and 101,000 in private-sector payrolls. That's the largest drop since March 2003. The decline in the overall jobless rate -- which is calculated based on a separate survey -- to 4.8% is a very modest silver lining because the number of job seekers seems to have declined.
Those jobs numbers suggest that first quarter economic growth will be meager, if not negative. We'd like to offer some policy remedy, but the politicians already think they've done their part with their "stimulus" rebates set to land in voter pockets this summer. But at best this will provide a temporary fillip to consumer spending. A tax cut aimed at lifting incentives to invest has no major backers -- which is another reason to worry.
That means everyone is putting all of their hopes on the Fed and easier money. This is a dangerous way to live. This expectation is weakening the dollar and thus lifting dollar-denominated prices, especially in commodities. Rising food and energy prices, in turn, are stealing much of the discretionary income from the very consumers the rebate checks are supposed to motivate to spend more. But if easier money is the only weapon left, the pressure is overwhelmingly to fire it. Good luck.
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