Print

Mail

wiki links

Analysts say US Fed struggling to revive growth

"Banks don't need incentive to borrow as much as they need incentive to lend."

Kevin Giddis, analyst at Morgan Keegan

As more signs point to a US economy that is sinking fast, the US Federal Reserve is struggling to find ways to reignite growth even as confidence wanes among consumers, businesses and banks, analysts say.

As the Fed unveiled a series of efforts to get credit flowing after stunningly weak labor data, some analysts said the central bank's efforts may have little positive impact and threaten to erode its inflation-fighting credentials.

Recession fears were stoked by Friday's report that the US economy lost 63,000 jobs last month in a second month of declining employment.

The weaker-than-expected report boosted the odds of another cut in interest rates by the Fed, which has already slashed its federal funds target from 5.25 percent in September to 3.0 percent.

The Labor Department report was released minutes after the Fed announced actions to pump more liquidity into the distressed banking system, which is reeling from a horrific slump in housing and tighter credit, in a further threat to economic growth.

But some say the Fed is losing a grip on efforts to jumpstart the economy.

"Banks don't need incentive to borrow as much as they need incentive to lend," said Kevin Giddis, an analyst at Morgan Keegan.

"We are in an unprecedented real estate and credit crisis that is whipping its way through the US economy like a midwestern tornado," he said.

Fred Dickson, market strategist at DA Davidson & Co, said the interest rate cuts are failing to help spur economic activity and that the Fed "should stop cutting rates."

"The rate cuts simply aren't working and result in putting more pressure on the dollar and oil prices, which is compounding the problems in the credit market and the economy," Dickson said.

Ethan Harris, an economist at Lehman Brothers, said the collapse of the US dollar while gold and oil have surged to records are potential inflation indicators that threaten confidence in the Fed, but predicts the central bank will regain the upper hand.

"We believe that loss of confidence will be short-lived -- as the economy and commodity markets weaken both actual and expected inflation will likely fall," Harris said.

Still, Harris said the US will be unable to avert recession because the Fed's rate cuts and the US$168 billion economic stimulus passed by Congress will take time have an impact.

"We are now penciling in a recession in the first half of 2008 and have trimmed our already very anemic recovery figures," he said.

"The feeble economy should ease inflation over time," he said.
This story has been viewed 1648 times.