Tags: Schwab | Fed | Policy | Economy

Charles Schwab: Fed's Policy Harming Economy

Monday, 06 February 2012 07:13 AM

CEO Charles Schwab says the Federal Reserve's prolonged, “emergency” near-zero interest policy is hurting, not helping the economy.

"The Fed policy has resulted in a huge infusion of capital into the system, creating a massive rise in liquidity but negligible movement of that money," Schwab writes in The Wall Street Journal. "It is sitting there, in banks all across America, unused."

"The multiplier effect that normally comes with a boost in liquidity remains at rock bottom. Sufficient capital is in the system to spur growth — it simply isn't being put to work fast enough," wrote Schwab, the founder and chairman of the Charles Schwab Corp.

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Federal Open Market Committee members said last month the central bank plans to keep its benchmark interest rate at almost zero until at least the end of 2014, extending a prior pledge to hold rates steady through mid-2013.

Moreover, says Schwab, average American savers and investors in or near retirement are being forced by the Fed's zero-rate policy to take greater investment risks.

"To get even modest interest or earnings on their savings, they move out of safer assets such as money markets, short-term bonds or CDs and into riskier assets such as stocks," Schwab notes. "Either that or they tie up their assets in longer-term bonds that will backfire on them if inflation returns," he says.

"They're also dramatically scaling back their consumer spending and living more modestly, thus taking money out of the economy that would otherwise support growth."

The destructive run of capital out of Europe and into safe U.S. assets such as Treasury bonds, reflects a world-wide aversion to risk, says Schwab.

“New business formation is at record lows, according to Census Bureau data,” he points out. “There is still insufficient confidence among business people and consumers to spark an investment and growth boom.”

“In short, the Fed's actions, rather than helping, are having the perverse effect of destroying the confidence of businesses and individuals to invest and the willingness of banks to loan to anyone but those whose credit is so strong they don't need loans.”

Other experts agree that Fed strategy can hurt, rather than help, the markets.

John Taylor, founder of currency-hedge fund FX Concepts LLC, said he’s betting against the dollar after Federal Reserve policy makers extended their pledge to keep interest rates close to zero and indicated they’re prepared to make additional asset purchases.

The Fed purchased $2.3 trillion of debt in two rounds of so-called quantitative easing known as QE1 and QE2 as it sought to support the world’s biggest economy. Fed Chairman Ben Bernanke said Jan. 25 that he’s considering another program of debt purchases if economic growth proves slower than desired, Bloomberg reported.

“I am shorter the U.S. dollar than I am the euro,” Taylor said in an interview on Bloomberg Television’s “Inside Track” with Erik Schatzker. “We are going to have QE3 at some point and they stretched the time we are not going to have higher rates. That was a tremendous hit to the dollar. The dollar was doing fine until Bernanke came up with that idea.”

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