federal reserve

Tricky balancing act for the Federal Reserve

Lynn ReaserBankrate's recent second-quarter survey of economists found a generally upbeat view of the economy looking out over the next year. Beneath the surface, however, many of the experts also saw a range of factors continuing to restrain the economy. Chief economist Lynn Reaser at Point Loma Nazarene University in San Diego is fairly optimistic about the job market. But the former president of the National Association for Business Economics also has a number of concerns, including excess caution on the part of employers and the risk of burgeoning inflation. In the following interview, Reaser discusses issues facing the economy.

You're forecasting that the unemployment rate will slip to 6.1 percent over the course of the next year and the economy will add an average of more than 200,000 jobs per month. Can you elaborate?

The case for a robust, sustained rebound is still elusive. Companies still seem to be somewhat cautious in terms of hiring. The costs of health care reform are still very much on their minds. We are still seeing a lack of robust growth overseas, and the dollar's strength will have some impact on our export potential. Companies are still very concerned about containing costs, and the doormat for robust hiring does not appear to be in place.

Job growth should be good, at around 200,000. That represents a solid gain, but it does not appear that will be spectacular. At the same time, we should get more growth in the size of the labor force, which will put some brakes on the reduction in the unemployment rate.

Are we still feeling negative effects from the financial crisis?

We are, to some extent, still paying the penalty of the financial crisis. Recoveries following those types of downturns typically are slow, subpar, with relatively disappointing job growth.

This was such a deep and traumatic financial downturn that it may, in fact, take some time. Individuals are certainly attempting to spend more, as they can. But we have experienced the ongoing slow increase in real wages, and the middle class is still not making much headway, which is putting something of a damper on their overall spending.

When we asked in our survey whether the economy is at risk from either too much or too little inflation, you answered, “too much.” But don't at least some Federal Reserve board members fear the opposite is true?

The current view is very much based on the recent evidence, which has suggested that price increases are indeed subdued. The risk, I believe, comes from the fact that we have a lot of tinder in the fireplace -- meaning that there are huge amounts of excess bank reserves that are currently parked at the Federal Reserve. If banks start to put more of those reserves to work, we could see the potential for a rather quick absorption of excess capacity and upward pressure on overall price levels, and the Federal Reserve may be in a situation where it will be hard to play catch-up and contain the inflation risk in time.

Are Federal Reserve policies failing to address that inflation risk?

The Federal Reserve is balancing the risk between unemployment and inflation, and at the present time the risk does seem to be more on the side of a lack of full employment. The view of monetary authorities is that if the switch comes more quickly than they believe, that Fed policymakers could make the necessary adjustments.

People like myself are concerned that the inflation risk might be more evident than the Federal Reserve currently anticipates, and that could be a problem because monetary policy operates with a significant lag. It can be difficult, politically, to raise interest rates very rapidly, and then it takes time before higher rates actually affect the economy.

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