What the Fed’s move means to Main Street
By Greg W Howard
Birmingham Personal Finance Examiner
August 11th, 2010
Tuesday, in an act that will long be debated, the Federal Open Market Committee (FOMC, or simply the Fed) acknowledged the gathering storm clouds of an economy sliding dangerously back toward a serious recession by announcing it would “maintain its balance sheet” and engage in “quantitative easing.” There was no change in the Fed’s policy to maintain the funds rate at 0 to .25 percent. So, what exactly does this mean to Main Street?
First, one must understand the surrounding economic environment. The first sentence of the FOMC statement is quite telling.
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.
Taking a look at the economic data of the past 10 days, this may be an understatement.
First thing in the morning, Tuesday, productivity for the 2nd Quarter was announced to have dropped 0.9 percent. This was mixed news. It means that workers, who had been maintaining a productive pace and allowing companies to not have to hire more workers to maintain operations, were not able to maintain the pace. Companies had been relying on worker gains in productivity to fatten balance sheets without taking on additional employees in an uncertain environment. For the unemployed, it would normally signal a need for companies to hire.
But does this mean more hiring in the future? In a normal economic environment, yes, stagnant or dropping productivity would lead to hiring. However, this is unlikely in the immediate short term. Much of the gains in industrial production earlier this year were due to inventory building and restocking. As a result, there does not seem to be a pent up demand against which to hire workers. In fact, on August 3, 2010, consumer spending and personal incomes were reported flat, no change. Without increased consumer spending, there is no need to increase production.
The official U1 unemployment rate (those receiving unemployment benefits) is a 9.5 percent. Meanwhile, the real rate of all those unemployed, underemployed, and who have simply given up is being reported by such experts as Bob Chapman at better than 22 percent.
The Boston Globe reported last week that a new record of 40.8 million Americans were now relying on food stamps.