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Quantitative easing is the most likely option before Federal Reserve Chairman Ben Bernanke.

Manuel Balce Ceneta, Associated Press

Psychology matters with the Fed

  • Article by: ADAM BELZ
  • Star Tribune
  • September 12, 2012 - 9:49 PM

Analysts expect Ben Bernanke to say Thursday that the Federal Reserve will take new action to stimulate the U.S. economy.

So what?

Aside from the stock market's likely approval, economists say the impact may be difficult to see. Business leaders in Minnesota say Fed action would boost business confidence, ideally spurring investment and job creation. But casual onlookers can be forgiven for failing to see what all the fuss is about.

"This is more of an emotional deal than a substantive deal," said Bill Blazar, an executive at the Minnesota Chamber of Commerce. "The actual impact may be very difficult to measure, but at this stage of the recovery, the psychology of it may be more important than the substance."

The economy has been stuck in some summer doldrums. Growth has been slow, Congress has failed to settle the federal budget, a presidential election is coming up, Europe's financial crisis is ongoing and the August jobs report was a disappointment.

Pressure is on Federal Reserve Chairman Bernanke to do something, but his options have winnowed. The most likely one is a move known as quantitative easing.

Usually the Fed tries to stimulate the economy by lowering interest rates on bank-to-bank lending, which pushes down rates on everything else -- from car payments to lines of credit for factories. The idea is that low interest rates encourage lending, borrowing and economic activity.

But the bank-to-bank interest rate -- or federal funds rate -- is already near zero.

That leaves the Fed with a narrower set of options. The one investors expect is for the Fed to buy more assets from banks to help drive down other interest rates. New cash replaces the purchased assets, and the Fed hopes banks start lending.

Voilà. Quantitative easing. The central bank has already tried it twice in the past four years.

Investors want a third round, and the stock market has moved upward this week on hopes they'll get what they want. The possibility -- as well as widespread interest in Bernanke's economic forecast -- is why investors will hang on the chairman's every word today.

What's less clear is the impact to business on the ground. The meat-and-potatoes reason for quantitative easing is to spur business investment, and businesses in Minnesota feel cautious.

Bob Kill, president of Enterprise Minnesota, which consults for manufacturing companies, said many owners would welcome another round of easing, but he isn't sure where the impact would show up.

"Is there a direct effect? I find it hard to believe there is," Kill said. "But sometimes the indirect effect is as important as the direct effect."

Business owners would feel better if the Fed did something, Kill said, and the boost in confidence could lead to investment. Despite what he calls the "tempered enthusiasm" that's come with a summer of mixed economic news, many companies are healthier than they were four years ago and a little nudge from the Fed could push an owner to expand a factory or add a business line.

Businesses are already borrowing more money in 2012. Bank commercial and industrial loan portfolios were up 15 percent at the end of June compared with a year earlier, according to the Federal Deposit Insurance Corp.

But the area of the economy where banks are not lending as much money is unfortunately the largest: real estate. The U.S. real estate lending portfolio fell about 1 percent by the end of June, and is still 15 percent below what it was in 2008.

"It doesn't seem to me this is likely to do much to speed up the economy," Stinson said. "It's not like we're facing a recession. We have a slow growth economy."

Stinson thinks the U.S. economy is stable and the latest news from Europe is encouraging enough to hold off fears of imminent lapse into recession. The Fed should hold on to its bullets, he said, especially considering the increasing likelihood the country could go over the fiscal cliff at the start of 2013.

Blazar said businesses have several good reasons to expand today, yet they're not, because they're nervous. Construction costs are low, rates are rock-bottom and workers are available. The businesses he talks to are optimistic about their long-term future, but their short-term outlook is cloudy.

"Their hopes and dreams are alive and well," he said, "but they're still lying awake at night thinking about tomorrow."

Adam Belz • 612-673-4405

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