The Fed has been fighting demographics and the “winter” economic season since bailing out financial institutions after much loose lending and risky investments leading to turmoil in 2008. A natural decrease in consumer spending and an increase in saving by aging baby boomers was seen by Harry many years ago.
Demographics alone should have resulted in a natural pullback in stocks, deleveraging of debt along with deflationary pressures in this “winter” economic season.
The Fed helped avert financial calamity initially but didn’t stop there. Zero interest rates weren’t enough. The Fed realized that deflation was a major concern and Ben Bernanke (Fed Chair) started printing money to create inflation.
I won’t get into the details of the QE (quantitative easing) programs that just recently ended… except to say that Fed tinkering went far beyond their mandates in my opinion.
The Fed is mandated by congress to direct the nation’s monetary policy to “influence conditions to pursue maximum employment, stable prices and moderate long-term interest rates.”
U.S. employment has gone through a reset since 2008. According to the Bureau of Labor Statistics (BLS), the official unemployment rate is back below 6% while the estimate for U-6 (includes short-term discouraged workers) dropped to about 12%. When you take a look at John Williams’ Shadow Government Statistics, ShadowStats Alternate Unemployment Rate sits at 23.2% and hasn’t dropped since the beginning of the crisis in 2008.
Dent Research has found that much of that job growth has been in lower paying jobs. Lower paying jobs means low or no wage growth and lower consumer spending. So even though the BLS calculates we are near full employment (since they don’t count millions of adults not employed or under employed), wage growth is still absent.
Price stability is also important to the Fed and was the main driver for the multi-trillion dollar QE program. The Fed set an inflation target for the consumer price index (CPI) of 2%, and it’s not been reached after six years of zero interest rates and QE.
Could the Fed have confused consumer price stability for stock prices? Is it possible that they confused employment growth and wage growth for stock market appreciation? The S&P is up about 260% since the beginning of 2009. The Dow Jones Industrial is up about 257% in the same time frame with no significant pullbacks along the way.
I do believe the Fed should help maintain the stability of our financial system, as it relates to banking and it should provide certain financial services to depository institutions. But someone should also be responsible for supervising and regulating our banking system to ensure stability of the system.
The Fed shouldn’t be authorized to pursue maximum employment or stabilize prices by printing money. The U.S. Treasury should not benefit from the interest received on printed money. According to data from the Federal Reserve System, more than $500 billion has been transferred to the Treasury since 2008!
Power to control monetary policy, or at the very least, the ability to print needs to be taken away from the Fed. But how will that happen since a big chunk of the created money is going to the U.S. Treasury?
If it did happen, politicians might actually have to figure out how to raise taxes or maybe cut expenditures.
Good luck with that!