During the Milken conference in Los Angeles two Federal Reserve Presidents raised the warning that the U.S. might be moving towards a “Fiscal Cliff” at the end of this year if slated tax increases and spending cuts are put into effect.
Charles Evans of the Chicago Fed termed the cliff a “big uncertainty” while Atlanta Fed President Dennis Lockhart said there could be a “financial shock” if markets begin to anticipate that Congress and the White House do little to address this situation.
The anticipated tax increases and spending cuts were set in motion when a congressional “super committee” failed to devise a way of closing the federal budget deficit.
The concerns of these two Fed presidents is echoed by many who fear that Congress, in terms of having the intestinal fortitude to do the right thing, will do little or nothing until it is too late.
“I’d like nothing better than to start raising rates before late 2014 on the strength of a stronger economy,” said Evans, the Chicago Fed chief. He is referring to the “tremendous room” for more Fed accommodation, stating, “more liquidity would be helpful. It would ratify the idea that [Fed] policy is going to be accommodative for a very long time to get things going. Look, we might get lucky in the sense that … the channel opens up and we get a greater lift in the economy.”
Instead of keeping rates low until late 2014, Evans thinks the Fed should employ “economic triggers” on which to base accommodation such as keeping low rates if the unemployment rate is above 7.5 percent. “Unless inflation unexpectedly goes up to a very high level, say 3 percent,” Said Evans.
Lockhart is less enthusiastic and also worried about activating higher inflation. The Atlanta Fed President said that while the first-quarter GDP and March jobs data were frustrating, “I am a bit reticent to pull the trigger on any action. We have to see how the economy evolves. Pulling a number out of the air is a bit too simplistic.”
He went on to say, “There’s only so much we can do to stimulate loan demand, and to change the risk appetite of the financial system or banks, so I’m not sure that more really active stimulus in the form of quantitative easing, for example, would have that much of an effect. But the longer-term costs have to be kept in mind, costs related to inflation expectations, for example.”
Both Fed presidents acknowledged they know the on going low interest rates are hurting savers. “We’re in a tough situation and the current slow recovery is hurting everybody,” said Evans.
Lockhart also noted that “we can only have one policy, and that policy is designed to support the recovery. So unfortunately there are winners and losers.”
Many have recognized that their situation has put them in the “looser” category, and have decided to take a proactive approach and are hedging their portfolios with physical gold in the form of bullion and numismatics or rare coins.