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The U.S. economy flirts with recession , but Federal Reserve policymakers meeting today and Wednesday have few options.

Too few jobs were created in April and May, and with unemployment claims rising, June and July will not register much better progress.

Wages, which were rising modestly through the recovery, have been virtually flat the past three months. An already tough labor market is getting worse.

Worker productivity is down, indicating businesses have more employees than needed to meet demand, and layoffs will follow if sales don’t pick up. Conditions in Europe, and a weaker euro and Chinese yuan, indicate exporters and import-competing businesses face a tougher environment this summer.

Retail sales slipped in April and May, as consumers exhibit new caution about taking on debt. Auto sales are off their first quarter peak.

In manufacturing, the bright star of the recovery, new orders fell the last two months, and factory output was down in May, notably for autos, appliances and computers.

Throughout the economy businesses report falling prices—slashing prices to sustain sales is an ominous indicator of more layoffs.
The Federal Reserve has pulled all the levers that could make a significant difference. Short-term interest rates—such as the overnight bank borrowing—are already close to zero.

When the Federal Reserve Open Market Committee met in April more bond purchases to push down long-term Treasury and mortgage rates were on the table. Since, risk-averse investors have moved cash from Europe to U.S. securities. The 30-year Treasury and mortgage rates are near record lows, preempting the effectiveness of further Fed action.

Should conditions worsen in Europe, the Fed can shore up U.S. banks with exposure to European financial institutions. However, those actions would not offset lost U.S. exports across the Atlantic, or in Asia that compete with European products benefiting from a cheaper euro.

Lost exports could easily slice $120 billion from U.S. GDP , destroy over a million jobs and raise unemployment to 9 percent—and a meltdown in Europe could trigger even worse conditions.

A statement that the Fed intends to keep short rates near zero beyond 2014 would have little effect on investor psychology—few expect higher rates in the foreseeable future.

Central bank policy can dampen inflation when the economy overheats and lift borrowing and home sales a bit when it falters, but it can’t instigate faster growth when the President and Congress fail to address chronic problems.

Demand for U.S. products is burdened by huge trade deficits on oil and consumer goods with China—both result from government inaction.

Two years ago, President Obama warned China he could act if it did not abandon its cheap yuan policy, which he says slows U.S. growth, but he hasn’t taken substantive steps.

Imposed by the President and Congress, stiff restrictions and bans on drilling in the Gulf, off the Atlantic and Pacific Coasts, and in Alaska are reducing U.S. production 4 million barrels a day and doubling imports.

Monetary policy can’t compensate for those policy missteps.

Americans pay twice what Germans do for health care, adding about $4 to 5 an hour to worker health insurance—something neither Obama Care nor Republican alternatives will solve—and makes adding jobs in America too expensive.

Most Dodd-Frank reforms are in place, and those have permitted the biggest banks to control 60 percent of U.S. bank deposits. Wall Street banks continue to run casinos, but won’t make enough loans to regional banks or small and medium sized businesses—simply, trading securities creates million dollar bonuses, old fashioned lending does not.

President Obama’s stimulus spending and low interest rates offered a period of grace to fix those problems but the opportunity was squandered.

Chinese currency mercantilism, oil imports, expensive health care, and big bonuses on Wall Street are smothering U.S. growth.

America is simply becoming too much like Greece and not enough like Germany, and not much the Federal Reserve does can compensate.

Source:  CNBC

The Federal Reserve ordered the 19 largest U.S. banks to test their capital levels against a scenario of renewed recession with unemployment rising above 11 percent, said two people with knowledge of the review.

The banks stress-tested the performance of their loans, securities, earnings, and capital against at least three possible economic outcomes as part of a broader capital-planning exercise. The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans last month. The Fed will finish its review in March.

“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,’ ” said Jonathan Hatcher, a credit strategist specializing in banks at New York-based Jefferies Group Inc. Regulators don’t want to see banks “come crawling back for help

Dodd-Frank Act

The Fed also wants banks to consider how the Dodd-Frank Act overhauling financial oversight might affect earnings, and how they will meet stricter international capital guidelines, according to the November notice. Banks will also have to consider how many faulty mortgages investors may ask them to take back into their portfolios. Standard & Poor’s Corp. estimates mortgage buybacks could cost the industry as much as $60 billion.

The Fed’s adverse economic scenario included a 1.5 percent decline in gross domestic product from the fourth quarter of last year through the end of 2011, said the people, who declined to be named because the Fed hasn’t made the details of the review public. The scenario assumed growth resumes, with output rising 4 percent over the fourth-quarter 2010 level by the end of 2013. Unemployment would peak at more than 11 percent by the first quarter of 2012 and drop back to 9.5 percent by the end of 2013.

Federal Reserve spokeswoman Barbara Hagenbaugh declined to comment on the specifics of the Fed’s parameters.

Growth Outlook

While Fed policy makers want banks to be prepared for a slump, they aren’t predicting one. In January, members of the Federal Open Market Committee forecast growth of 3.4 percent or more annually over the next three years, with the jobless rate falling to 6.8 percent to 7.2 percent in the fourth quarter of 2013. Unemployment averaged 9.6 percent in the final three months of 2010.

As part of the most recent capital exam, regulators have made one of the largest data requests in Fed history, outside of normal regulatory reporting, asking banks for information about their securities, loans and other holdings. This will give the Fed the ability to check and even challenge the assumptions banks make about their portfolios.

Financial-Risk Unit

The tests are being overseen by a new financial-risk unit assembled by Chairman Ben S. Bernanke and Tarullo. Known as the Large Institution Supervision Coordinating Committee, or LISCC, the unit draws on the Fed’s deep bench of economists, quantitative researchers, regulatory experts and forecasters and looks at risks across the financial system. The LISCC last year helped Bernanke respond to an emerging liquidity.

100 Fed Staff

The dividend increases, if they happen, will be one of the most carefully screened payouts in U.S. regulatory history, with more than 100 Fed staff working on the capital analysis of the banks.

Congress is also watching. The Fed should be cautious about allowing banks to reduce their capital through dividends or stock repurchases, House Democrats, including Representative Brad Miller of North Carolina, said in a Feb. 15 letter to Bernanke.

“We applaud your undertaking new stress tests on the banks,” the lawmakers said. “It appears doubtful, however, that the stress tests alone can resolve the uncertainty facing those banks to justify reducing their capital.”

The Fed’s involvement in decisions normally reserved for boards shows how far the Dodd-Frank Act has pushed regulators into corporate governance.

“It is an uneasy balance between regulating an institution and running it,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics in Washington, a research firm whose clients include the nations’ biggest banks. The Fed is moving “far more assertively” on bank oversight, she said.

2009 Stress Tests

As with the 2009 stress tests conducted by the Fed during the crisis, one of the goals is to assure that bank capital can support new loans to creditworthy borrowers. Loans and leases of banks in the U.S. contracted at a 10.3 percent annual rate in 2009, a 6.2 percent rate in 2010, and at a 2.6 percent rate in January.

The Fed’s unprecedented exam of the 19 largest lenders in May 2009 concluded that 10 U.S. banks needed to raise an additional $74.6 billion in capital.

Banks were “destroying” value when they repurchased billions of dollars of stock in the years leading up to 2008, only to issue shares later at lower prices after they needed capital amid the crisis, said Jefferies Group’s Hatcher, a former bank examiner for the Federal Deposit Insurance Corp.

“Whether it is liquidity, capital or earnings, banks are on a much better footing than they were a couple of years ago,” said R. Scott Siefers, managing director at Sandler O’Neill & Partners LP in New York, a brokerage and research firm specializing in financial companies. “Still, you can pick your caveat. We are only in the early stages of an earnings recovery on the lending side and the legislative and regulatory framework is still in flux.”

Read entire article at Bloomberg.com

Federal Reserve Chairman Ben Bernanke told a House committee that the central bank will act to ensure that inflation does not take off. “I do want to repeat that we are extremely vigilant. We will be very careful to make sure that we don’t wait too long,” Bernanke said. However, he did not offer any indication that the Fed is about to tighten monetary policy. The Wall Street Journal (2/10), National Public Radio/The Associated Press (2/9) For additional information Visit http://mazumacapital.com