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Industry Insight

The Fed Backs Off – No Increase, More Worry

By Dr. Joe Webb
Published: June 23, 2016

The Federal Reserve’s latest statement shows continued befuddlement about why they can’t get inflation moving higher and why the raw numbers of employment are weak. So they called a time out and will wait for things to change.

Inflation measures are rigged down using methods that minimize price increases, so it’s hard for the Fed to get readings that would allow them to claim success. Interest rates are falling around the globe: even Germany briefly had negative rate 30 year bonds recent trading. They’re paying between 0.6% and 0.7%. The US has some of the highest interest rates in the world, especially for a developed economy. These low rates were supposed to stimulate the underlying asset prices for many loans, especially houses, to make fewer of those loans “underwater.” That stimulation was supposed to occur quickly, but years of compounding are making gains lower than they seem after adjusting for inflation.

 The Fed is stuck, and even their jawboning to the markets creates only temporary asset rallies. My bet: they raise rates and start another round of quantitative easing. One of the ways they could get out of this is to lower corporate tax rates significantly, which would stimulate business investment, and allow them enough daylight to raise rates because of such an “unwise” decision.

 Twenty years ago Alan Greenspan’s moves followed where market rates were going. As he became concerned about Y2K (remember that?) he was more aggressive and started to work on his own. That second strategy of trying to lead rates continued through the Bernanke Fed, and now Dr. Yellen is picking up the pieces but dare not suggest any changes in tax and fiscal policy because of political consequences.

For every one percentage increase in interest rates, the Federal government pays an additional $180 billion – more than two printing industries – and other government entities that engaged in borrowing would also see their costs rise. Disengaging from these current interest rate policies seems unthinkable.

Economist John Tamny was recently interviewed about his new book about the Fed’s actions in these last years. It’s a good listen.

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.

 

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