Fed’s Running Out of Tools to Boost Economic Growth: Cato’s O’Driscoll

The Fed's decision to keep interest rates low and signified that credit will remain cheap and the Fed may know something about the US economy that US markets and investors do not.

By Morgan Korn
January 26, 2012
Yahoo! Finance

The FOMC's decision to keep interest rates near zero until late 2014 -- at least -- signifies two things:

1. Credit will remain cheap for consumers and businesses.

2. The Fed may know something about the economy that U.S. markets and investors do not.

At least that's how Gerald O'Driscoll feels. The former vice president of the Dallas Federal Reserve and a senior fellow at the Cato Institute said in an interview with The Daily Ticker's Aaron Task that the Fed's circumspection makes him question his own views on the economy.

"I was shocked by the implied pessimism of the forecast in the Fed statement," he says. "I feel the economy is improving. We have to assume the Fed may know something that things are really worse than I thought in the global financial system in order to explain the pessimism underlying their forecast."

O'Driscoll's take on the economy is similar to that of most experts at the libertarian think-tank. Essentially, he believes raising marginal tax rates will curtail job growth in the country and most likely send more jobs overseas. President Barack Obama underscored his administration's goal to end the practice of shipping manufacturing jobs offshore in Tuesday night's State of the Union Address. Obama said he would eliminate tax breaks for companies that move jobs overseas and reward companies that return jobs to the U.S.

The economic climate has certainly improved over the past few months, but many headwinds (Europe, high gasoline prices, a reversal in the unemployment rate) could derail the fragile recovery. Both the White House and the Federal Reserve are laying out new proposals and policies to stimulate growth, but it still may not be enough to get the nation back to pre-financial crisis levels.

"The Fed is running out of tools," says O'Driscoll. "The Fed has done everything it can possibly do. I would put everything on the table."

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