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August 30, 2012, 3:52 p.m. ET
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Getting Less Bang for Fed Bucks
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By DAVID REILLY
Even if Ben Bernanke hints Friday that the Federal Reserve may step yet again on the monetary-policy accelerator, there is no guarantee that consumers and businesses will rev up their economic engines.
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In the face of numerous Fed attempts to spur growth, one measure of economic activity, the velocity of money, has continued to fall. This gauge, which measures how often a dollar is turned over in the economy, continues to plumb the lowest levels in more than 50 years.
Velocity of money fell yet again in the second quarter, based on the most recent estimate of gross domestic product. This means that even as the Fed has expanded its balance sheet, consumers and businesses have still chosen to hoard rather than spend cash.
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Another indication of reticence is the continued growth in bank deposits. Data from the Federal Deposit Insurance Corp.'s quarterly banking profile out earlier this week showed that deposits at insured institutions continue to set records, hitting $10.3 trillion in the second quarter, a 5.7% increase compared with the year-earlier period.
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That is striking and shows the continued uncertainty among households and business executives, given that deposits receive negligible yields. Indeed, a quarter of U.S. domestic deposits are now held in noninterest-bearing accounts.
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Of course, some may see this as evidence that the Fed has actually been too timid in its approach and should be expanding its balance sheet more vigorously. That, though, would increase the risk of inflation, should the velocity of money finally change course.
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As things now stand, and with politicians unwilling to undertake the fiscal fixes that should complement central-bank actions, further moves by the Fed similarly may fail to ignite growth.
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