July 15, 2014

Fed's Failed Monetary Experiment About To End


The Fed: The recovery is not yet "complete," Federal Reserve Chairwoman Janet Yellen suggested Tuesday, but the central bank plans to let interest rates rise anyway. We'll soon learn just how solid this so-called recovery is.

'The economy is continuing to make progress toward the Fed's objectives of maximum employment and price stability," Yellen told Congress, predicting "a moderate pace" of growth for the economy "over the next several years."

Sadly, we don't fully share her rosy outlook. Indeed, we think the Fed's extraordinary interventions over the past 5-1/2 years have distorted markets and prices, and have held the economy back.

Sure, by its zero-interest-rate policy (ZIRP) and $85 billion- a-month quantitative easing (QE) debt-buying program, the Fed helped push up stock prices. And low interest rates no doubt gave the economy a boost.

But now, as the Fed prepares to unwind ZIRP and QE, we'll find out just how resilient the economy is.

A strategy of holding interest rates at zero and pumping nearly $4 trillion into financial markets may seem wise, but it's not. It's like putting a patient on life support for years, then expecting him to function normally.

For one, the Fed's easy money made it easy for President Obama and Congress to spend record amounts, pushing our nation's total indebtedness to $18 trillion.

Thanks to a current Treasury bond yield of 2.5% or so, we spend "only" about $250 billion a year on interest. What happens when the Fed tightens and Treasury yields shoot up to 5%, 6% or higher? And when, as the CBO now estimates, we add $40 trillion to our already unsustainable pile of debt over the next 20 years?

Taxpayers will soon learn the meaning of "no free lunch," because taxes will have to soar to pay for Obama's failed Keynesian spending binge — whose ill effects were disguised by Fed monetary manipulation.

Then there's the unseen financial damage to retirees, pension funds and others who've seen their incomes dwindle as rates are kept artificially low. They've been punished for being thrifty and careful. Memo to Fed: Punishing savers is a flat-out foolish policy.

Despite this, economists and some Fed officials insist that the central bank's quick, aggressive, post-meltdown actions saved us from another depression. In fact, the economy hasn't responded well at all to "stimulus" by the Fed or the White House.

Since the recovery began, gross domestic product has risen a paltry 10%. By comparison, the average for all recoveries, good and bad, since World War II is 21% by this time. Doing the math, we're missing about $1.5 trillion of annual GDP — or $4,761 in lost income for every American man, woman and child.

Not only is GDP smaller than it should be, but according to Heritage Foundation calculations we're also short more than 5 million jobs.

Millions have left the workforce, pushing the labor participation rate down to a 36-year low of 62.8%. Our 6.1% unemployment rate is really more like 10%.

It'll be years before all the damage to our economy is fully known. But it should be clear by now if it wasn't before: The Fed's radical intervention has not been a success, and the costs are only now becoming apparent.

(Ads will not print)