July 2 (Bloomberg) -- Federal Reserve policy makers are fighting a “civil war” over how best to boost the faltering U.S. economy, Princeton University economist Alan Blinder said.
Today’s report showing U.S. manufacturing unexpectedly contracted for the first time in almost three years indicates that the slower economic growth may promote more accommodative policies from the central bank, Blinder said today in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Scarlet Fu.
“Data like this that keep coming in are encouraging or strengthening the positions of the doves on the Fed,” Blinder, a former Fed vice chairman, said. “You know there’s a big civil war going on in the Federal Reserve, and weakening the position of the hawks.”
Fed officials led by Chairman Ben S. Bernanke on June 20 downgraded their forecasts for U.S. growth and employment while noting “significant downside risks” to the economy. They also announced they would swap $267 billion in short-term Treasury securities with longer-term debt in an extension of their so-called Operation Twist program.
Blinder, 66, said a third round of so-called quantitative easing by policy makers purchasing additional mortgage-backed securities “is waiting in the wings as the most likely thing for the Fed to do next.”
The Institute for Supply Management said today its manufacturing gauge fell to 49.7 in June, worse than the most-pessimistic forecast in a Bloomberg News survey, from 53.5 the month before. Figures less than 50 signal contraction. Measures of orders, production and export demand dropped to three-year lows.
Blinder said members of the policy-setting Federal Open Market Committee should engage in a lively debate and express dissenting views, while also exhibiting more discipline in public.
“Have as much of a food fight as you want inside the FOMC, which would be the opposite of the Greenspan FOMC, which is totally polite and structured,” Blinder said. “Then try to come out and sing from the same hymnal.”
Blinder said the Fed doesn’t have the power to counteract the negative effects of the automatic government spending cuts that would result if Congress can’t agree on a budget, known as the “fiscal cliff.” He said triggering that provision may cause gross domestic product to contract by 3.5 percent to 4 percent.
The term “fiscal cliff” refers to tax-and-spending changes set to take effect at the end of this year unless Congress acts. The George W. Bush-era income tax cuts will expire, as will a temporary cut in the payroll tax. About $1.2 trillion in automatic spending cuts over a decade will be poised to start, expanded jobless benefits will expire, and the government will approach the legal limit on federal borrowing.
“Ben Bernanke opens the cupboard, it’s not bare. He keeps saying that, ’It’s not bare; I have some things in there,’” Blinder said. “Well where are the 4 percent of GDP weapons? There isn’t any, there isn’t. I don’t think they have anything that’s 1 percent of GDP, maybe not a half a percent of GDP.”
To contact the editor responsible for this story: Chris Wellisz at firstname.lastname@example.org