When, Oh When, Will The Recovery Reach You?

Many economists say the United States has emerged from a recession, but it doesn't always feel that way. After a week like this past one, anyone who was waiting for the anemic economy to show signs of vitality was probably disappointed. Host Liane Hansen speaks with NPR's Jim Zarroli about the sluggish U.S. economy.

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LIANE HANSEN, host:

Many economists say the United States has emerged from a recession, but it doesn't always feel that way - especially after a week like this past one. On Tuesday, the Federal Reserve issued a statement saying the recovery is slowing. And in the days that followed, the stock market took a big tumble. In short, anyone who is waiting for the anemic U.S. economy to show signs of vitality was probably disappointed.

NPR's Jim Zarroli joins us to discuss where the economy is going. Hi, Jim.

JIM ZARROLI: Hi, Liane.

HANSEN: So the big news this week was Tuesday's Federal Reserve meeting. What happened there that got people so worried?

ZARROLI: Well, it wasn't what they did; it was more what they said. They issued a statement, as they usually do after a meeting, listing some of the things that were wrong with the economy, like weak consumer spending, weak bank lending. None of this should be news to you if you follow the economy. But when the Fed says something, people have a way of sitting up and taking notice, and there was this sort of shudder that went through the financial markets. And you saw stocks really fall.

HANSEN: So Jim, if the Fed is so concerned about the growth of the economy slowing down, what is it doing to try to get the economy moving again?

ZARROLI: Well, one of the things it did, it announced at the meeting this week, was a small shift in strategy. The Fed, during the height of the financial crisis, said it would buy up a lot of mortgage-backed securities as a way of pumping money into the housing market. The plan originally was that when these assets matured, they would just take the money and sort of retire the debt.

But what they said this week was that they would buy more Treasury securities. It's essentially a way of getting money into the financial system so banks will lend more. Now, this step that they announced this week, it's not going to do a lot by itself. And there are certainly people who think the Fed ought to be doing more.

HANSEN: Well, what are some things that the Fed can be doing now that it isn't?

ZARROLI: Well, it's difficult because, you know, the usual thing the Fed does when the economy is slow is, it lowers interest rates, which makes it cheaper to borrow. That usually gets the economy moving again. But right now, interest rates are just about as low as they can get, and people aren't spending and investing. So the Fed has to come up with a new approach. And there, you're kind of getting into experiments, into uncharted territory.

One of the things they could do, for instance, is to start buying up a broader range of assets, and doing it on a much bigger scale. The idea, again, is to get money pouring into the system so people will spend, they'll invest more.

HANSEN: So why do you think the Fed hasn't tried that kind of approach yet?

ZARROLI: Well, it's not clear. I mean, Ben Bernanke really likes to operate by consensus. He's famous for that. It may be that the other Fed governors just aren't there yet. A lot of people think this approach that the Fed has pursued -of putting so much money into the financial system - is inflationary.

One of the most prominent critics is Thomas Hoenig, who heads the Kansas City Federal Reserve and is a voting member on the Fed board. And this week, he warned about keeping interest rates too low for too long. He said one of the reasons we got into this speculative real estate bubble that has now caused us so much trouble is that the Fed kept interest rates low for too long after 9/11.

Now, he's in the minority. But the point is, we're in uncertain times; there's a lot of disagreement; and Bernanke has to bring everybody together.

HANSEN: We're in uncertain times, and midterm elections are approaching. What role do you think politics will play in the efforts to get the economy moving?

ZARROLI: Well, it means there's very little chance we're going to see any more stimulus spending from Washington for the time being. It also means that the Fed and the White House and Congress have to operate in a much more contentious political climate. And yet, you know, the unemployment rate is still 9 and a half percent. We had first-time unemployment claims actually going up again this week. So there's more pressure on everybody to do something about it.

HANSEN: NPR's Jim Zarroli. Jim, thanks very much.

ZARROLI: You're welcome.

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