(Repeats item from Sunday)
By Emily Kaiser
SINGAPORE, Aug 8 U.S. Federal Reserve Chairman
Ben Bernanke, an expert on the Great Depression, once promised
that the central bank would never repeat its 1937 mistake of
rushing to tighten monetary policy too soon and prolonging an
He has been true to his word, keeping interest rates near
zero since late 2008 and more than tripling the size of the
Fed's balance sheet to $2.85 trillion. But cutbacks in
government spending may end up having a similarly chilling
effect on the economy, and there is little Bernanke can do to
Back in 1937, the U.S. economy had been growing rapidly for
three years, thanks in large part to government programs aimed
at ending the deep recession that began in 1929.
Then the central bank clamped down hard on lending, and
federal government spending dropped 10 percent. The economy
contracted again in 1938. The jobless rate soared.
"Regarding the Great Depression. You're right, we did it.
We're very sorry. But thanks to you, we won't do it again,"
Bernanke said back in 2002 at a conference honoring legendary
economist Milton Friedman's 90th birthday.
ANALYSIS on U.S. policy options: [ID:nN1E772077]
PREVIEW of China economic data: [ID:nL3E7J31SV]
Bernanke's 2002 speech:
For IFR's forecasts for the week ahead in U.S. economic
data, please click on: link.reuters.com/waw92s
Bernanke convenes the Fed's next policy-setting meeting on
Tuesday, facing growing concern that the United States may be
slipping into another recession while Europe staggers toward a
deeper debt crisis. Standard & Poor's decision on Friday to
lower the U.S. credit rating adds yet another element of
His options are limited.
Nigel Gault, chief U.S. economist at IHS Global Insight,
said the Fed could promise to keep interest rates near zero or
its balance sheet swollen for even longer than investors
anticipate. Or it could buy even more U.S. government debt.
"It is hard to see any of these options as 'game
changers,'" Gault said. "The Fed would be doing them not
because it could be sure they would make a huge difference, but
because it would feel the need to do something."
Gault put the odds of another recession at 40 percent.
However, Friday's U.S. employment figures soothed recession
fears, showing the economy created 117,000 jobs in July. That
was up from a revised 46,000 in June and prior months payrolls
were revised up slightly. The unemployment rate slipped to 9.1
percent but mostly because workers dropped out of the labor
"While I do not think this sounds the all-clear signal, it
does quell some of the conversation that the U.S. is falling
back into a recession," said Tom Porcelli, chief U.S. economist
at RBC Capital Markets in New York.
"Having said that, there are still plenty of headwinds,
like Europe. I am also very encouraged to see the upward
revisions to the previous months. This report pulls us back
from the ledge a little bit."
HITTING A POTHOLE
Full employment is one of the Fed's prescribed goals, and
it is clearly falling short. Government spending cuts are
making matters worse. Friday's employment report showed a net
loss of 37,000 government jobs last month.
State and local governments with balanced budget rules had
little choice but to cut jobs in order to make ends meet. The
federal government has no such restriction, but its spending
outside of defense fell at a 7.3 percent annual rate in the
second quarter, crimping economic growth.
Michael Feroli, an economist with JPMorgan in New York,
said he had held out some hope that Congress would approve some
form of additional fiscal support in the coming months, but the
debt ceiling fight showed lawmakers dead set against that.
"It now looks likely that growth could hit a pothole early
next year," Feroli said.
He cut his growth forecast for the first half of 2012 to
2.0 percent from 2.5 percent. At that sluggish pace, the
jobless rate won't fall much below 9.0 percent, keeping the Fed
on hold until at least the middle of 2013, Feroli said.
Without fiscal help, the Fed will be under greater pressure
to find some other way to lift growth. Another round of
government bond purchases would no doubt elicit wails of
protest from emerging markets, which contend that the Fed's
easy money spills into their economies, driving up inflation.
China, whose $1.16 trillion in Treasury holdings are second
only to the Fed's, has not been shy about expressing its
concern over the state of U.S. public finances and the dollar's
Yang Jiechi, China's foreign minister, said on Friday that
Washington should enact "responsible monetary policies" to
ensure global economic stability, a thinly veiled reference to
the Fed's bond-buying programs.
China releases its monthly economic data this week. The
figures are expected to show double-digit gains in industrial
output and retail sales, suggesting the country's economic
growth remains robust.
Strong growth in China has helped to lift the rest of Asia,
outside of Japan, which is still hurting from the March
earthquake and tsunami. But all bets are off if conditions
worsen significantly in the United States.
"Our view is that the region can 'decouple' from modest
slowdowns, and we think the ongoing slowdown qualifies as
modest," said TJ Bond, emerging Asia economist at Bank of
America-Merrill Lynch in Hong Kong.
"We would start to worry if the U.S. tipped over into
(Editing by Dan Grebler)