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A look at the Fed’s big decision

Marketplace Staff Oct 4, 2010

A look at the Fed’s big decision

Marketplace Staff Oct 4, 2010


BILL RADKE: Today I’ve been thinking of “The Wizard of Oz,”
when Dorothy reaches the crossroads and the scarecrow can’t decide which way she should go. I’ll leave the thought hanging there while I introduce senior U.S. economist Julia Coronado,
at BNP Paribas. She’s joins us live from New York. Hi Julia.

JULIA CORONADO: Hi. How are you?

RADKE: Good, thank you. I don’t want to call Ben Bernanke a scarecrow, but he is up there trying to scare away another recession, and he’s deciding which way to go. Julia, tell us why this week is so important for that decision.

CORONADO: Yeah, well as you mentioned, we get the employment report for September and it’s the last really significant data reading before the Fed meets to decide what to do in a couple of weeks. And what we’ve seen is the economy really getting stuck in a rut lately. And it was something that the New York Fed president called “wholly unacceptable” on Friday. They’re really looking for indications that we’re getting unstuck and they may not need to do something. Otherwise, I think they’re going to move forward.

RADKE: “Wholly unacceptable,” Batman. And the Federal Reserve is the big game now, right Julia? Because no one is expecting much from the politicians before the election?

CORONADO: Absolutely. I mean, we’ve heard lots of proposals over the last few weeks from the president, from the Republicans. But really, realistically, nothing gets done until after the election and even then we’re going to have a lame duck session until January. So probably not a lot of progress can be expected on the political front.

RADKE: And quickly, Julia, what are basically the risks of the Fed overreacting now or under-reacting?

CORONADO: Well the risks of under-reacting are if the Fed doesn’t do anything and the unemployment rate continues to rise, then we could move towards a double-dip recession. We don’t seem to be there or close to there now, but again if the unemployment rate is rising then people start losing faith in the recovery and retrenching and pulling back.

RADKE: And overreacting, Julia?

CORONADO: And overreacting — I think the Fed risks losing its credibility. If the Fed acts and it doesn’t work, then what good is the Fed? Then we start seeing people losing faith in the dollar as a storer of value, we start seeing interest rates rising, making it more expensive to borrow. So there are risks on both sides for sure.

RADKE: Julia Coronado at BNP Paribas, thank you.

CORONADO: My pleasure.

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