Fed Speech May Offer Ideas To Revive Economy

Federal Reserve Chairman Ben Bernanke will deliver what's being billed as an important address about the troubled U.S. economy Friday. He'll do so at the annual Fed conference in Jackson Hole, Wyo. Growth has slowed this summer and the unemployment rate is stalled at 9.5 percent.

LINDA WERTHEIMER, host:

The center of global finance is in Wyoming today. Central bankers from around the world are gathered in the mountain resort of Jackson Hole for an annual meeting. Later this morning, U.S. Federal Reserve Chairman Ben Bernanke, is scheduled to deliver an important speech about the U.S. economy.

The Fed is under increasing pressure to come up with new ways to stimulate the economy, which is slowing down.

But as NPR's Jim Zarroli reports, Fed officials are divided about which way to go.

JIM ZARROLI: Ben Bernanke came into office promising to make the Fed more transparent about how it makes decisions. But openness comes at a price. For one thing, differences that once might have been covered up now get aired.

Professor DEAN CROUSHORE (Professor of Economics, Rigsby Fellow, University of Richmond): Right now, we're kind of in an interesting situation, where I've never seen a Federal Open Market Committee so divided about the course of action.

ZARROLI: Former Fed Economist Dean Croushore, who's now with the University of Richmond, says that since the financial crisis erupted, the Fed has poured a huge amount of money into the nation's banks in order to encourage them to lend and get the economy moving again. But some inflation hawks on the Fed believe this will come back to haunt the economy at some point.

Prof. CROUSHORE: That extra on trillion dollars of excess reserves that are just sitting in bank vaults or on deposit at the Fed, those are going to come rushing out and be lent and it'll be hard to rein that in once it gets started.

ZARROLI: But other Fed officials say inflation is not remotely a threat, and they want the Fed to take more aggressive steps to stimulate the economy. As chairman, Bernanke has strived for consensus, but some critics say the Fed's efforts to strike a middle course have sent a muddled message.

David Kelly, chief market strategist at JP Morgan Funds, wishes Bernanke would set a more optimistic tone about the economy. He says Bernanke's remarks have sometimes obscured the good things that are happening, like the surge in mortgage refinancing.

Dr. DAVID KELLY (Chief market strategist, JP Morgan Funds): It's allowing people to reduce the interest payments on their most important debt. So I think consumers are getting in better shape. Businesses are certainly in better shape. Corporate profits are up. There are things to be positive about. But, you know, we just dont hear very much of it in the news media.

ZARROLI: But Sam Stovall, chief investment officer at Standard and Poor's says, if the Fed's message has sometimes appeared somewhat muddled, it's because its future course is so unclear. It's had to wrestle with a major financial crisis, and its efforts to get the economy back on its feel by cutting interest rates haven't succeeded.

Stovall points out that interest rates are already about as low as they can get.

Mr. SAM STOVALL (Chief investment strategist at Standard & Poor's): I think that they only have a few options available to them, and now people are questioning well, how much more stimulation can the government employ, combined with what more can the Treasury the Fed do in order to help pull us out of this crisis of confidence?

ZARROLI: There are steps the Fed can take to try to stimulate growth, like buying bigger quantities of Treasury bills, but it's not clear these measures will succeed. Stovall says this uncertainty about Fed policy has added to the anxiety about the economy. Stocks have slid sharply in recent weeks on the heels of disappointing news about the housing sector and jobs.

Mr. STOVALL: I think the market is responding to the concerns that we could be slipping into a 3-D economy, meaning double dip with deflation.

ZARROLI: These questions about Fed policy have come at a time when Washington is already squabbling over whether to extend the Bush tax cuts. With Congress and the White House unable to take action, the Fed is being called on to step in. But charting a course is proving anything but easy.

Jim Zarroli, NPR News, New York.

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