Blinder Cuts U.S. Forecast, Says Fed Must Plan for More Easing
Former Federal Reserve Vice Chairman Alan Blinder trimmed his forecast for U.S. growth while saying it’s unlikely the nation will slide back into a recession.
“It is a little too early” for the Fed to resume asset purchases on a large scale to boost the economy, Blinder, a Princeton University economist, said in an interview today on Bloomberg Television’s “Street Smart.” Still, “they certainly should be thinking about it.”
Blinder, who reduced his 2010 growth forecast to a range of 3 percent to 3.5 percent, said he disagreed with the view of Princeton colleague Paul Krugman that the U.S. may be in the early stages of a depression.
“I still doubt we will have a double dip,” Blinder said. “The truth is jobs have been growing, not shrinking. Consumers are spending pretty normally. Business investment is looking pretty good.”
The Fed signaled last month that Europe’s debt crisis may harm U.S. growth and repeated a pledge to keep interest rates near zero “for an extended period.” The central bank cut the benchmark interest rate almost to zero in December 2008 and turned to purchases of Treasury, housing-agency and mortgage- backed securities as the main tool for monetary policy.
Employment fell in June for the first time this year because of a drop in the number of U.S. census workers, while private payrolls rose 83,000, the Labor Department said. Reports over the past month showed a plunge in home sales, a slump in consumer confidence, cooler manufacturing and less growth in the first quarter.
Should such “pessimistic” data be “‘portents of what’s coming, then the Fed needs to be prepared to go back into quantitative easing in a big way.”
Blinder cited gains in productivity and disagreed with Pacific Investment Management Co.’s idea that the U.S. economy is poised for an extended period of below-average economic growth, or a “new normal.”
“I don’t buy into that at all,” he said. “I think the data are almost screaming in the other direction.”
Blinder said weakness in housing and reduced job growth prompted him to lower his forecast of last December for growth of as much as 4 percent in 2010.
“The data over the last couple of months have given pause,” Blinder said. “Housing has underperformed. The big, big thing that has happened in the last couple of months is a very sharp slowdown in the number of private-sector jobs.”
The economy grew at a 2.7 percent annual rate in the first quarter and will expand 3.1 percent for the year, according to the median forecast of 54 economists surveyed this month by Bloomberg News.
Blinder said he agreed with Krugman on the need for more government spending.
“I think we need a little bit more out of Washington,” he said. “There is still room for some more fiscal stimulus. I would like to see it very targeted to jobs creation. That is the real problem we are having now.”
Krugman has warned that a lack of Fed stimulus could lead to deflation, or a sustained and broad-based decline in prices, and harm the central bank’s credibility.
“We are looking at what could be a very long siege here,” Krugman said in an interview this month in Princeton, New Jersey. “We really are at a stage where we should have a kitchen-sink strategy. We should be throwing everything we can get at this.”
Central bank policy makers have recently signaled little interest in further easing.
Fed Governor Elizabeth Duke and the leaders of Fed district banks in Richmond, Dallas and Kansas City said during the past week that they see no need for more monetary stimulus and the U.S. recovery remains intact. Richmond Fed President Jeffrey Lacker said yesterday any “consideration of additional easing steps is very far away.”
The U.S. has lost more than 8 million jobs since the start of the recession in December 2007, the most of any slump in the post-World War II era.
Policy makers won’t raise interest rates until the second quarter of 2011, based on the median estimate in a Bloomberg News survey of economists this month. The debt crisis in Europe has prompted analysts at Barclays Capital Inc., Credit Suisse, UBS AG and Deutsche Bank AG to push back by several months their predictions for a Fed rate increase.