US Economic Recovery Slowing Pace: How can the Federal Reserve Boost Growth?

The US economy is recovering at a slow pace and that should sound like a relief to most of us. But, it’s the nature of this recovery process and the global uncertainties which do not allow us to be complacent at this point in time. Many question the role of Federal Reserve in bringing life back to US economy, till sometime back even I was in the same club. The fact of the matter is that the Federal Reserve did a good job in a tough environment, but that does not mean their job is done. The recovery is still fragile, and without a booster dose from the Federal Reserve it can still taper out amid changing global scenario, mainly Europe heading into recession mode.

So far, the data is suggesting that the economy is getting up on its feet but there is a high probability that economic growth with remain low for years to come. Now, in this scenario the Federal Reserve should not be too satisfied with the growth numbers as that could make United States a permanent low growth region. Time is ripe for taking action, even if the Fed can’t do anything more than booting more liquidity through another round of quantitative easing.

Economic Signs of Improvement: Better Days ahead?

If you take a look at much talked about unemployment numbers, they will only add to your cheers. Unemployment rate dropped significantly to 8.6% from a consistently held 9%. Is this a temporary relief or things are actually changing for better?

Let alone, US economic activity is improving and the retail sales data makes a good case for higher growth in the third quarter. Consumers are the backbone of US economy, and its almost certain that without their participation recovery process is not self-sustainable. Now, as the employment scenario is showing signs of improvement, we can expect consumer confidence to rise sharply.

Companies holding record cash levels could gain some confidence from demand pick-up, and that is when the engine starts with full throttle creating more jobs.

What should the Federal Reserve do to trigger higher growth?

Now, the Federal Reserve can watch the whole scenario from the sidelines and wait for the economic engine to gain traction at a slow pace, or it could take a proactive stance by proving a dose of liquidity to the system and keeping the interest rates where they are till the employment situation stabilizes completely. That said, we cannot expect the unemployment rate to get back to pre-recession lows, but anywhere around 7% should be achieved before the Federal Reserve starts raising rates.