Federal Reserve’s Open Market Committee, to no one’s surprise, announced earlier this week that it would be leaving the federal funds target rate at 0.25 percent, exactly where the rate has been since December 2008. How could anyone look at the following two charts and not come to the same conclusion: the Federal Reserve hates savers?
Federal Reserve: What is their goal?
Perhaps hates is too strong a word; it’s more like the Federal Reserve is displeased with people that save money in interest bearing assets, akin to the way parents are displeased with a lot of what teenagers do.
Recently, the New Yorker published a piece in glowing support of the Federal Reserve’s continued meddling in the market for interest bearing assets.
The article had two basic conclusions.
First, since savers are a minority – at least those that live off of interest bearing assets – it’s okay to give them the shaft. The idea is that the billions in forgone income of savers are justified by some theoretical boost to the economy.
The second conclusion is summed up as follows: “There’s a myth that monetary policy is a zero-sum game. But it’s perfectly possible that looser monetary policy could make both savers and borrowers better off. When the economy is weak, tight money makes the whole pie smaller. When the economy is robust, we get more output, which means more real income, and that usually means higher rates of return for investors.” Bottom line: low interest rates make the income pie greater. The author of the piece, James Surowiecki, even goes so far as to say that if the Fed did raise interest rates, savers would be worse off in the long run.
People outside the economics profession might ask: are these two conclusions real, while most individuals within the profession generally agree with Surowiecki.
The questions are: is the Federal Reserve right in artificially keeping interest rates low, and second, is it good that the vast majority are simply cheerleaders (the New Yorker as one of them) for easy Fed monetary policy?
The simple answer is: no, the Fed has it wrong and so do the pom pom holders, and here are two brief reasons why.
The first reason is that there is little evidence that the Federal Reserve’s actions are useful. Supporters of the activist fed policy generally fall into the “ya, but what if …”, where some theory about what economic conditions would be like if the Federal Reserve wasn’t so activist. Many, perhaps most (although it’s mostly a herd mentality, so majority is a relative word here), have come to the conclusion that something much more negative than what we have now would follow the “ya, but what if…” statement. The likely correct answer is the exact opposite, and here are a couple of reasons why.
The first reason deals with evidence, meaning evidence suggests the Federal Reserve should back off. The figure shows the simulated effect of the federal funds target rate on quarterly GDP change. It’s gone quite negative in recent quarters, indicating the Federal Reserve should get out of the pious meddling business. This chart likely in and of itself likely wouldn’t convince anyone at the Fed to change their mind, although it should. It’s a pity the burden of proof isn’t with the Federal Reserve to show beyond a reasonable doubt that what they are doing is useful. There’s no way they could meet that standard. Instead, the evidence standard appears to have shifted more towards the non-meddling types (critics of the Fed).
Second, the Federal Reserve continually sends the wrong signal to individuals outside the financial markets. In the mind of the Fed, financial market participants matter a lot, perhaps even more so now than ever before. The thinking is that by appeasing to the desire of market participants for low interest rates – which generally boosts asset prices, confidence will grow and thereby improve economic conditions. This signals to all outside observers – and most importantly businesses doing the majority of the hiring – that there’s little confidence in future economic conditions. Apparently that’s the signal the Federal Reserve wants to send, but it’s not the signal non-financial individuals and businesses need to hear.
Overall, it’s hard to justify continued Federal Reserve meddling given the lack of evidence supporting its actions. The Federal Reserve likely made a mistake today, providing further evidence that voting members of the Federal Open Market Committee really don’t care much for savers.