The Federal Reserve lacks the tools to sufficiently grow our economy.
The minutes of the most recent Fed policy committee meeting at the end of April suggests the central bank is perplexed that worker employment and income are growing yet inflation remains below the 2 percent target for nearly three years and consumption and investment are stalling. While job growth improved in April - bringing unemployment down to 5.4 percent - industrial production is lackluster and retail sales were flat from the previous month.
At the start of the year, several members of the Fed believed the labor market would firm up and inflation would exceed the 2 percent target relatively soon, requiring the Fed to increase interest rates by mid-year to prevent an “overheating” of the economy. Based on this past meeting, most do not believe the economy could weather a rate hike that soon.
Investors expect to see a single rate increase by the end of the year, as reflected in current asset price levels.
The Fed sets monetary policy through a committee consisting of up to seven Washington-based officials and presidents of the 12 regional Fed banks across the country. The short-term federal funds rate has hovered near zero for almost seven years since late 2008.
Economic growth stalled in the first quarter due to weather conditions, quirks in government data reporting, the appreciation of the U.S. dollar that decreased net exports, and falling oil prices that limited investment and did not result in a rise in consumer spending. The Commerce Department reported that retail sales were unchanged from March to April.
Unfortunately, much of the Fed’s optimism for the economy and labor market in the medium term was based on a robust rise in consumer spending, which has not materialized. Also, the Fed believes the effects of the dollar and oil may have prolonged negative effects going forward.
More importantly, the Fed is concerned that it may need to focus more on the long term effects of raising interest rates. When they reduced their bong buying program in 2013, rates increased leading to higher mortgage rates and a housing slowdown.
Rather than reducing the money supply, the Fed is planning an untested approach to raise interest rates: paying banks to limit lending. That is, the Fed will provide a high rate of interest to the member bank reserves held at the central bank, so the banks need not lend it to business and consumers. The details of this mechanism are in flux, leading to investor apprehension.
In essence, the Fed is intentionally looking to reduce lending and business investment.
Direct domestic business investment is the key driver of long-term, sustainable economic growth. Investment
in employment and capital expenditures will boost jobs, productivity
and inflation-adjusted wages. Ironically, the Fed’s policy will further undermine the objective they wish to accomplish: namely, economic growth.
Again, it’s time to put growth first.
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