The Fed: The Beatings Will Continue Until Morale Improves

Today’s statement from the FOMC is clearly targeting jobs.  Because they believe inflation is not a problem and the currently weak economy could get worse from global problems (presumably Europe and China), they felt they had nothing to lose from taking major action.  So they commenced a full frontal attack through the bond market.

Their objective is to lower longer-term interest rates to make it easier for corporations and people to borrow, hoping this will stimulate business and consumer activity that will increase demand for labor.

They pledged to relentlessly continue the assault until jobs come back or inflation gets uncomfortable, whichever comes first.  Basically, the beatings will continue until morale improves.

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The idea that the FOMC is doing as much as it can is good, but monetary policy is only one tool and is not sufficient to fix economic problems by itself.  This is especially true in the current situation because trying to stimulate borrowing to repair an economy that is ill from an overdose of borrowing is not going to cure the disease.  In addition to not being a complete solution, a big risk of monetary action working alone is that asset bubbles form, such as in the stock market where prices rise far beyond what is supported by the fundamentals (revenues and earnings).

Fiscal policy is missing in action.  We spent our rainy day money during the big party that ended in 2007, so right when the economy needed productive deficit spending and/or a stimulating tax cut there wasn’t any.  Meanwhile, for one example, the country’s physical infrastructure continues to deteriorate right next to an army of unemployed and under-employed.

Addressing issues with the tax code to alleviate business uncertainty and increase productivity would remove an impediment to hiring, but our political class would rather fling their feces at each other rather than working toward ideal effective tax rates.

Lowering the minimum wage to reduce the cost of hiring is a logical step to increase the demand for labor and reduce unemployment, but the mere proposal would cause conniptions among too many ideologues and economically ignorant inside the beltway and state capitals.

So here we are, waiting for monetary morphine to make us all better.  Good luck with that.

Press Release (FOMC)

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