News Column

Fed Action May Not Help, Economists Say

Sept. 11, 2012

Jack Katzanek

Hands exchanging money

The weak report on job growth released last week immediately gave rise to fresh suggestions that the Federal Reserve would take new action to spur economic growth.

But there are many who doubt that the agency that sets the federal government's monetary policy has the proper ammunition to help Inland Southern California, an area that needs more economic advantages than most areas, experts say.

Four years ago the Federal Reserve, in response to the near-meltdown of the United States' financial system, lowered the country's primary interest rate virtually to zero in an effort to stimulate the economy. Chairman Ben Bernanke could push for an extension of a pledge to hold the rates that low for the next two years when he convenes a meeting of the Fed's Open Market Committee later this week, analysts said.

Friday the Department of Labor reported that 96,000 jobs were added in August, down from a 141,000 increase the previous month.

"It's probably the straw that broke the camel's back," Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wis., told Bloomberg News. "The data we have doesn't point to that substantial and sustainable improvement in the economy to justify sitting on their hands."

Federal Reserve rates are lowered to make it easier for common people to borrow money, which spurs business growth. In San Bernardino and Riverside counties, roughly two-thirds of all new jobs are created by business owners with fewer than 100 employees.

Vincent McCoy, executive director of the Inland Empire Small Business Development Center, a counseling service operated by Cal State San Bernardino's Center for Entrepreneurship, said some current initiatives, including Small Business Administration programs, should be extended. McCoy said he's not certain that Federal Reserve action will accomplish what Inland businesses need, though.

"But we need to do something," McCoy said. "It's hard for people to feel confident when government does nothing at all. The state of inaction is detrimental, and if they do nothing it's a fundamental mistake."

Another issue for the Inland area's economy is diminished home equities prices. McCoy said that, before the economy turned bad, a homeowner could start a business using a home as collateral.

But the Fed does not have much power to help homeowners. More than 40 percent of Inland people making mortgage payments currently owe more on the home that it would appraise for, but fixing that would probably take congressional action and is tied to the job market.

"Foreclosure issues are a jobs issue," said Craig Blunden, president and CEO of Provident Financial Holdings, parent of Riverside-based Provident Savings Bank. "People don't lose their homes if they're employed."

Economist Christopher Thornberg of Los Angeles-based Beacon Economics said banks are already sitting on excess cash but are careful about lending. The alternative, he said, is for the Fed to somehow bypass the banks, but Thornberg does not see Bernanke advocating such an extreme move.

"It's not a desperate situation. The economy is growing," Thornberg said. "The Federal Reserve is supposed to act in reaction to a crisis. What crisis is there right now?"

Brad Adams, owner and CEO of Sunstone Engineering Group, a Temecula manufacturer of automotive parts, said that if Bernanke initiates new policy later this week, it could be perceived as a political maneuver.

Also, Adams said creating an environment that's better for job growth is the job of Congress and the executive branch.

"Bernanke's job is to maintain financial stability," Adams said. "I don't support the Fed being so active."

If the Fed does extend the low interest rate, it means diminished savings account returns, especially for people living on fixed incomes, Redlands-based economist John Husing said.

Also, circulating more money has the potential to spur inflation.

"That has not happened and is not likely to happen," Husing said.

Bloomberg News contributed to this report.

Source: (c)2012 The Press-Enterprise (Riverside, Calif.) Distributed by MCT Information Services