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Economy not falling, but not better yet

Steve Henn Aug 12, 2009
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Economy not falling, but not better yet

Steve Henn Aug 12, 2009
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TEXT OF STORY

Kai Ryssdal: In the grand scheme of things, the statement that the Fed put out today after its meeting was downright euphoric. Almost two years after the recession started, the economy is officially not getting worse anymore. From Washington, Marketplace’s Steve Henn reports.


STEVE HENN: Just under a year ago, the U.S. economy came crashing into the emergency room bleeding uncontrollably. Basically we’ve been in intensive care ever since.

VINCENT RIENHART: The bleeding has stopped, but it doesn’t mean the patient’s better. They are just moved to a different wing of the hospital.

Vincent Rienhart is a former Fed economist who is now at the American Enterprise Institute. He says the economy still needs support.

RIENHART: And that will come in the form of keeping interest rates low potentially for a while.

You can think of those low short-term interest rates as kind of like a pain killer, almost a morphine drip for the economy. Pleasant but addictive.

And the Feds been using even stronger medicine too. It’s been buying hundreds of billions of dollars in mortgaged-backed securities and long-term Treasury bills, trying to push long-term interest rates down as well. The Fed planned to go cold turkey on Treasury bills next month.

RAYMOND STONE: And there was some expectation that that may be extended.

Raymond Stone at Stone & McCarthy says, instead…

STONE: They decided to wean us off of it. In other words, instead of just going through the program as initially planned, and ending it at the end of Septmeber, they’re extending it through October, but buying less in the weeks ahead. So when they eventually do stop buying, it will have less of an impact on the market.

Stone says by tapering off this way the Fed’s hoping to avoid shocking an economy that’s now hooked on government support. But this is just the beginning of our economic detox. The Fed is still buying roughly half of all mortgage-backed securities issued in America.

In Washington, I’m Steve Henn for Marketplace.

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