Central Banks vs. Uncertainty

"There continues to be what I'll call an 'uncertainty drag' on confidence and economic activity,"Dennis Lockart, president of the Federal Reserve Bank of Atlanta, said this week during a speech in Florida.

That's it exactly.

Uncertainty is a potent mix of emotion and unsettled cognition, breeding fear in the political arena and a sometimes toxic excess of caution in economies.

The slowdown in hiring the past few months, so alarmingly familiar in the three years since a recession officially ended but the jobs recession didn't, is all about uncertainty.

As winter ended, demand had been picking up, consumer and business sentiment had improved and the excess capacity of American industry had started to seriously ebb. But as anyone with even the slightest interest in politics or the economy knows, businesses have become reluctant to take on more workers.

The blockbuster pace of job creation early this year petered out in the spring, just as it did in 2010 and 2011. Last year's usual suspects were the earthquake/tsunami that slammed into Japan and throttled its economy, followed by a political trainwreck over taxes and budgets in Washington that damaged the once invulnerable U.S. government credit rating.

This year, too, some of the factors in the slowdown are obvious. Lockhart's list included: American households still trying to get out of recessionary debt; an anemic housing market; government cutbacks on the federal and local levels that produce tens of thousands of monthly layoffs; and the simmering risk of a financial meltdown in Europe that's already hurting U.S. exports. (I cribbed this list from what I wrote yesterday for the iPad publication The Daily.)

Anxiety over a U.S. election that will produce one of two radically different leaders further clouds the situation, as does a pending Supreme Court decision on health care reform that will resonate through workplaces and households, as does Congress's renewed inability to deal with the tax-and-budget issues that will take the country off the much-ballyhooed "fiscal cliff" at year's end if they're not resolved.

"It's clear that uncertainty is holding back hiring and capital expansion plans of U.S. businesses," Lockhart said.

And like San Francisco Fed President John Williams and Federal Reserve Board Vice Chair Janet Yellen, Lockhart suggested that if the employment situation worsens, the Fed could step in with a third round of massive bond purchases (QE3), a reshuffling of the bond maturities on its balance sheet or perhaps a hedged promise to keep the Fed's benchmark interests at historic lows beyond even the current 2014 horizon.

What these so-called doves didn't say, though, is how this would tackle the uncertainty.

Their more hawkish colleague, Dallas Fed President Richard Fisher, did. His answer: It wouldn't help at all.

At a UC San Diego conference today focused on China's currency, I asked Fisher if his view might evolve toward that of his colleagues, or even the publicly neutral stance of Fed Chairman Ben Bernanke, who told members of Congress shortly before Fisher spoke that "at this point I really can't say anything is completely off the table."

And if not the central banks -- I asked with Bernanke's congressional interrogators in mind -- who's job is it to deal with the current economic troubles?

An annoyed Fisher -- who probably realized I wanted him to elaborate on his vague reference earlier this week to "mischief that has become synonymous with Washington" -- started off professorially: Monetary policy is all about increasing or decreasing fuel for economic growth

Right now, banks are parking a huge amount of excess reserves with the Fed or the regional Fed banks.  The largest U.S. corporations have roughly $2 trillion in cash on their balance sheets. Several surveys of small businesses suggest they are not having trouble accessing capital (but that they are awfully worried by regulatory uncertainty).

Cash is available, and thanks to rock-bottom Fed policies, cash is cheap.

"We have extraordinarily low interest rates and we have liquidity sloshing around the system," Fisher said. "To me, the key issue is not whether the gas tank is full -- i believe it's overflowing … It's who will incent someone to step on the accelerator. That incentive can only come from the fiscal authorities."

Among central bankers, "fiscal" refers to the politicians who control taxes and spending.

"If you don't know what your taxes are going to be next year, and you have no idea because of the Supreme Court what the health care reform is going to mean for personnel, and you only know that spending will have to be redistributed and downsized, how can you plan your cost structure and how can you have confidence when you go to hire an employee what the cost of that employee will be," Fisher said. The turbulence in Europe and growth concerns in China just add to the anxiety.

"That's what's inhibiting employment growth, not monetary policy," Fisher concluded. "So in short, we're the good guys. The other guys? You can answer your own question."