BARRIE McKENNA

Wednesday, January 28, 2009

WASHINGTON — Ben Bernanke is facing a sobering reality: The U.S. economy is still deteriorating and there isn't much he can do about it.

The Federal Reserve Board has run out of conventional monetary ammunition, leaving the chairman and his Fed colleagues virtually powerless to counter a barrage of grim economic news as they huddle in Washington today.

Consumers are in their deepest funk in a generation, housing values are still collapsing and the bluest of blue-chip companies are laying off workers by the thousands.

"The current downturn will test monetary policy makers like no event in recent history," said economist Augustine Faucher of Moody's Economy.com. "Members can't use their primary economic tool: interest rates."

At its last meeting in December, the Fed's monetary policy committee slashed its key interest rate to near zero in a historic bid to combat falling prices and stir consumers and businesses into action. The committee also signalled its willingness to use unconventional tools to pump liquidity directly into the financial system, including outright purchases of government bonds.

But in the five weeks since, economic conditions have worsened.

Mr. Faucher predicted that today's Fed statement would address the possibility of setting a specific inflation target, as the Bank of Canada already does, as well as provide further details of its efforts to inject liquidity into the financial system. "The Fed will continue to adopt unorthodox tactics to fight the recession," he said.

Just yesterday, there was fresh evidence that two keys to recovery continue to drag the economy in the wrong direction - consumers and housing.

In January, consumer confidence plunged to its lowest level in the 42 years the U.S. Conference Board has been tracking the pulse of Americans. The index, which is based on a survey of 5,000 households, slipped to 37.7 from the previous record low of 38.6 in December.

Conference Board analyst Lynn Franco said Americans are more worried than ever about their jobs, their incomes and the wider economy.

"Consumers have begun the new year with the same degree of pessimism that they exhibited in the final months of 2008," Ms. Franco lamented. "We can't say that the worst of times are behind us."

And the mood of Americans is getting worse in the face of a daily catalogue of layoff announcements. Just this week, several iconic U.S. companies announced mass layoffs, including Caterpillar Inc. (20,000), Pfizer Inc. (8,000), Corning Inc. (4,900) and General Motors Corp. (another 2,000).

"Against a background of mass job losses, collapsing house prices, plummeting stock markets [and] restrictions on credit, confidence may not yet have reached rock bottom," said Paul Dales, U.S. economist at Capital Economics.

Particularly troubling is the state of the housing market.

Housing is a key source of wealth, a major employer and the main cause of banking weakness. And as long as that market continues to deteriorate, it's unlikely the U.S. economy will bounce back.

Home prices are still falling at a record pace across the United States, according to the latest S&P/Case Shiller home price index of 20 leading cities. It showed prices dropping a record 18.2 per cent between November, 2007, and November, 2008. Eleven metropolitan areas posted record declines and 14 markets had losses of more than 10 per cent. Home values are now off 25 per cent from their peak in mid-2006. As prices drop, Americans lose a bit more of their wealth.

Economist Ian Shepherdson of High Frequency Economics estimates that adult Americans are losing an average of $370 (U.S.) a week.

"No wonder people are miserable," he said.

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