Newspaper article The Christian Science Monitor

What the Fed Practices versus What It Professes

Newspaper article The Christian Science Monitor

What the Fed Practices versus What It Professes

Article excerpt

ACCORDING to Federal Reserve chairman Alan Greenspan, "since late October, ... the Federal Reserve has moved aggressively ... to ease money market conditions" - presumably to bring the economy out of recession. Unhappily, what the Fed says and what it does are often different.

The international value of the dollar has surged more than 10 percent since early February. That's a sure sign that even though short-term interest rates have gone down, money is still tight. If dollars were plentiful, their value would not be rising so rapidly.

The principal result of the Fed's stance is likely to be a more painful recession than either Washington or Wall Street anticipates. Even if the economy shows tentative signs of recovery, this "rebound" could be followed later by a further, deeper decline - a double-dip recession.

Last Friday, the Bureau of Labor Statistics (BLS) published its initial estimate of employment in March. Total employment (the number of people with jobs) dropped by more than 300,000. Nonfarm payroll employment (the number of jobs) went down 200,000. Unemployment jumped by 414,000.

These changes, of course, showed the ongoing pattern of recession in the United States. As a result, the BLS index of aggregate nonfarm hours worked (jobs multiplied by working time) went down at an annual rate of 5.6 percent in the first quarter. Such a drop would be consistent with a slump in real gross national product, the output of goods and services in the nation in deflated dollars, during the winter months at an annual rate of more than 4 percent, double the drop last fall.

While some measures of consumer confidence have rebounded to where they were last summer, both consumer income and spending are still going down after adjustment for inflation. As many bankrupt retailers will testify, the consumer sector (two-thirds of the US economy) has long been in a deep downturn.

At the same time, business investment - which usually falls sharply during recessions - remains vulnerable to a major drop. This is the real significance of the announcement by International Business Machines Corporation that first quarter profits would fall well short of expectations. …

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