Fed digs deeper hole by keeping interest rates low

The Federal Reserve is going to raise interest rates — but not now.

The economy is growing moderately — for the time being.

(Don’t worry, the Fed knows what it is doing — at least it hopes so.)

At the conclusion of its two-day policy meeting on Wednesday, the Federal Open Market Committee said it was leaving interest rates at rock-bottom levels.

That is exactly what the majority of people thought would happen, and what Wall Street — which was buoyed by the news — had been hoping for. The Dow Jones Industrial Average rose 76 points, or 0.4 percent, to 17,981, during the day.

And it is exactly what the Fed shouldn’t have done.

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rates remains appropriate,” the Fed said in its post-meeting press release.

The truth is, the Fed is in a bind. And it has been for much of the past seven years. Houdini would need help getting out of this straitjacket.

Here’s the predicament:

Despite historically low interest rates for a monumentally long period of time, the US economy is still growing — at best — only modestly. Even quantitative easing, the central bank’s bold and dangerous money-printing operation, couldn’t get the economy to kick into a higher gear.

The Fed could leave interest rates near zero forever, except that it is creating a massive amount of income dislocation. Americans who rely on income from their savings accounts — and have been getting none for a long time — have had to cut back. And this has hurt the economy.

People who invest heavily in the stock market — rich people, most would call them — have been doing just fine. But the wealthy can’t spend enough over a broad range of products to keep the economy buoyant.

Overpaying for Picassos and Manhattan condos just doesn’t do much for the nation’s gross domestic product.

And those members of the middle class who have benefited from lower rates, especially people with home mortgages that could be refinanced, have already done so.

In other words, the benefits of low rates are mostly used up. The big exception, of course, is the federal government. It continues to finance its massive budget deficit at cheap rates.

But the biggest reason the Fed needs to boost the short-term rates it controls is that other rates are already climbing. Even yesterday, on the heels of the Fed’s announcement, the rates controlled by investors rose.

In short, the Fed is losing its ability to influence the markets.

And unless the Fed raises rates, it won’t be able to bring them down if the economy craps out again.

Now that quantitative easing has been discredited as a means of improving the economy, jiggering rates up and down is the only recourse for the Fed.

The Fed had been handed a bit of good economic news in the past couple of weeks and it should have used the opportunity to take action. Job growth was better in May and retail sales also improved.

Both were anomalies: Job growth was boosted by seasonal adjustments, and retail sales were helped by rising gasoline prices.

Still, inklings of an improving economy gave the Fed a chance to pounce — and yet it didn’t.

Pouncing could prove harder in the months ahead.

In its statement, the Fed also said it was lowering growth projections for the economy for this year. But that was mainly because the economy contracted in the first quarter.

(As an aside, the Fed was dishonest about the first quarter, saying Wednesday that growth was “little changed” in the three months ended in March. In fact, GDP declined by a 0.8 percent annual rate, which is certainly a change.)

As of now, the Federal Reserve Bank of Atlanta says the nation’s economy is growing at an annualized 1.9 percent rate in the current quarter. That isn’t good growth since it should have had a nice bounce off the first quarter’s decline.

But it was growth.

The coming months aren’t as certain, especially when it comes to employment numbers.

As I’ve explained before in this column, employment numbers for May, June and July are helped by optimistic adjustments. Then that statistical optimism stops and the economy has to stand on its own.

The Fed could start raising rates at its July meeting. But it doesn’t look courageous enough to do so.

So the Fed is likely to repeat the mistakes it has made several times since the Great Recession of 2008. The scant excuse for raising rates will be missed. And the Fed will have to keep rates right where they are.

And the next time the economy takes a real dip, the Fed will have to sit on its hands and do nothing.

 

[“source – nypost.com”]