New Castle News


June 19, 2014

Our Opinion: Latest Fed report offers subdued picture

NEW CASTLE — Yesterday’s economic assessment by the Federal Reserve Board is a mixed bag.

Basically, the Fed said the economy is still improving overall, but mainly at a snail’s pace.

For 2014, the Fed is anticipating growth to be between 2.1 and 2.3 percent. In March, the estimate was 2.8 to 3.1 percent.

The revised figures are modest, particularly coming amid sluggish growth. The downgrade was tied to the past winter, which provided frozen temperatures and frozen economic activity.

Despite the lackluster assessment, the stock market responded with a modest bump upward following the Fed report. That’s because the Fed’s numbers indicate little desire to raise interest rates in the near future. With interest rates running low, it’s theoretically easier for businesses to borrow money. Plus, a low return on interest-bearing investments makes owning stocks more desirable.

Lowering the unemployment rate remains a high priority for the Fed. It now stands at 6.3 percent and the Fed board projects it to dip only to around 6 percent by the end of the year, one of the consequences of slow economic growth.

Meanwhile, the Fed is remaining on track to reduce its program of buying up bonds to stimulate the economy. Its monthly purchase of bonds will drop another $10 billion to $35 billion in July. Projections are that the program will stop completely by the end of the year.

That’s good news, because the economy needs to be able to stand on its own without this sort of intervention from the Fed. The gradual reduction in purchases is being accepted in the marketplace in calm fashion.

As for inflation — a perennial issue for the Fed — it remains hard to identify. The fed anticipates an annual rate of 1.5 to 1.7 percent by the end of the year.

While much of the groundwork appears to be in place for a robust economic recovery — low interest rates, a rising stock market, household debt being paid off and higher employment and home prices — it’s been that way for a few years now. Yet the economy seems to stumble along.

Federal Reserve Chairmen Janet Yellen cited uncertainty as the main cause of this. There is apparently a lot of money sitting on the sidelines among businesses and investors. But a variety of factors have produced hesitation in the investment world.

These include ongoing concerns in the Middle East, the situation with Russia and Ukraine, the longer-term consequences of health care reform and the lack of willingness in Washington to tackle a variety of economic-related issues — not the least of these is repairing a tax system that appeases special interests while failing to promote growth.

Sadly, we don’t expect much change in these areas. And neither does the Fed. So expectations of economic growth remain anemic.

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