Fed Official Suggests New Fiscal Policy Measures are Needed to Boost US Economic Recovery

It's starting to beome the prevailing sentiment among observers of the US economy that the Federal Reserve has done almost as much as it can do to stimulate the sluggish economy, and that additional fiscal policy measures need to come into play.

For one, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta said today that "There is a risk to monetary policy being employed too aggressively and without effect to address economic problems that can be resolved only by fiscal reforms that involve making tough choices about the allocation of public resources.”

“Monetary policy can exert a powerful positive influence on an economy, but as [Federal Reserve] Chairman [Ben] Bernanke has pointed out, monetary policy is not a panacea,” Lockhart said in remarks prepared for delivery at an event in Atlanta co-sponsored by the Latin American Chamber of Commerce and the World Affairs Council.

Lockhart is a mmember the Federal Open Market Committee, the Fed's arm that sets US monetary policy.

“Our current expansion is not on the track we would wish,” Lockhart said. “The recovery to date has seen weak growth and persistently high unemployment,” he observed, adding that “by any number of measures, the strength of the recovery has been and remains disappointing.”

While it may be anticipated that the Fed may take some additional potentially stimulative steps in the coming months, such as purchasing bonds in the open market, it is clear that Lockhart and many others are looking to fiscal stimulus to more rapidly expand the economy.

Economic Forecasts Reduced for Second Half of Year, But Upcoming Election Will Reduce Some Business Uncertainty

The outlook for the US economy and labor markets is weaker for the third and fourth quarters this year than it was just three months ago, according to a quarterly survey of professional economists conducted by the Federal Reserve Bank of Philadelphia this month.

However, with the presidential election coming up in less than three months, some of the uncertainty surrounding government tax, debt and spending policies may be reduced after Nov. 6, with at least the possibility of a more positive outlook.

The quarterly projected GDP growth figures are now 1.6% and 2.2% on an annual rate basis for the third and fourth quarters of 2012, vs. 2.5% and 2.6%, respectively, projected in May. 

The forecasters also cut their forecasts for the first two quarters of next year as well, to 1.8% and 2.3%, vs. 2.6% and 2.7%, respectively, three months ago, according to a posting on The Wall Street Journal's website on Friday.

Slower hiring and therefore a continued national unemployment rate above 8% through the second quarter of 2013 were also forecast by the survey.

Inflation, however, will remain under control for the foreseeable future, the survey indicates.

These results highlight the dilemma facing the federal government in its efforts to ratchet up economic activity. Recent indications that businesses are holding back on hiring and investing demonstrate the uncertainty with which they are approaching their business prospects over the next 12-18 months. At the same time, there has been some evidence that US manufacturing activity has picked up in certain sectors, that our exports are picking up, and that our trade deficit is narrowing.

The stalemate in Washington on debt, spending and tax policies has not helped the economic climate. Many business owners have said that the uncertainty surrounding the upcoming presidential election is another element that is holding them back from making longer-term commitments.

The outcome of the election is certainly in doubt at this point, with President Obama's economic record considered to be less than stellar but many voters also wary of Mitt Romney's approach to tax policy and entitlement reform.

When the election is over, some of the uncertainty will be reduced, and perhaps businesses will re-evaluate their positions on hiring and spending -- at least that's what we're hoping for.

Some Positive News Signals a Better Economy and Improved Obama Re-Election Prospects

Today's economic news brings with it the potential for a better-than-previously-expected US economy in the next several months, with a possible positive impact on President Obama's re-election prospects.

The new pieces of economic data released today show that first-time filings for unemployment fell in the most recent reporting week, rather than rising as some analysts had expected. The decline was not great, but it was in the right direction.

In addition, the US trade deficit narrowed in June to its lowest level in eight months. The decline was due in large part to cheaper oil imports, but also to a lesser extent to an increase in US exports to a record high $185 billion. Exports of US goods even increased to Europe, despite the financial problems being experienced there.

These pieces of positive news follow last Friday's announcement of a much-higher-than-expected increase in new employment in July -- 163,000 new jobs -- up from just 60,000 new hirings in June. The economy is far from being out of the woods, however, with the national unemployment rate actually ticking up by one-tenth of a percentage point in July, to 8.2%.

However, these positive data suggested to many economists that the economy may be improving, rather than stagnating as many had feared.

In response to the improved export numbers, Joel Naroff, of Naroff Economic Advisors, said, "As long as we can keep selling more of our goods across the world, the economy can (grow) at a moderate pace."

If these bits of good economic news foresage further positive data in the next couple of months, the prospects for President Obama's re-election will be improved from the current outlook, which is for a very close race. Let's see what happens in the next several weeks.