Yesterday, I suggested in this blog that the Fed meeting today (Tuesday, Aug. 10) may be pivotal in shaping the economy for the rest of the year.
After the meeting, I have to say "not so much."
The Fed took a very conservative approach to the potential problem of a stalled economy slipping into deflation. Since they have fired all of their interest bullets (key target rates are effectively zero), they pulled out their other trick.
By buying or selling securities into and out of its portfolio, the Fed can increase or decrease the supply of money in the market. More money (from buying securities) should make credit more available to businesses, which should allow them to begin hiring.
At least that's the theory. Unfortunately, this economy is not following accepted theory very closely. As federal stimulus dollars wound down, business was supposed to begin hiring, which stimulates the economy.
Rather than hiring, many businesses are hoarding cash and taking a wait and see attitude. This means that unemployment remains sickeningly high.
Consumers are also sitting on their wallets and paying off debt or stockpiling cash. This is a good move for individual's financial health, but not so good for an economy propped up by consumer spending.
The Fed is concerned that the economy may slip into another recession. Adding more to the money supply continues a multi-year policy, although in recent months that had slowed.
The Fed statement issued after their meeting signals they are concerned and prepared to do more if necessary. Stay tuned.
To learn more about the Fed, check out this article on What Is the Fed and What Does It Do?
Follow me on Twitter