Investors digested the big news…the Fed’s announcement that it would continue handing out money, asking nothing in return, for the next three years.
The New York Times reported:
The Fed said that it now planned to keep short-term interest rates near zero until late 2014, continuing the transformation of a policy that began as shock therapy in the winter of 2008 into a six-year campaign to increase spending by rewarding borrowers and punishing savers.
“What did we learn today? Things are bad, and they’re not improving at the rate that they want them to improve,” said Kevin Logan, chief United States economist at HSBC. “That’s what they concluded – ‘We’ve eased policy a lot, but we haven’t eased it enough.'”
The new forecast showed that the Fed expects to hit its inflation target over the next three years, but to fall well short of its goals for unemployment. The Fed projected that unemployment would drop no lower than 8.2 percent this year, just slightly below the current rate of 8.5 percent, and no lower than 7.4 percent by the end of next year. By the end of 2014, the Fed still expects that at least 6.7 percent of people actively interested in working would not be able to find jobs.
How do you like that, dear reader? The Fed has goals for unemployment and inflation. Targets. And it moves its policies around in order to achieve its goals.
Of course, it doesn’t necessarily hit its goals. Still, we’re supposed to believe that by trying to hit them it somehow encourages them in the right direction…
Most people believe they are successful. Which makes us wonder. Maybe the Fed should set goals for other things? Weight-loss goals, for example.
The idea is that by changing interest rate and banking policies the Fed actually influences inflation and employment. So, there’s a logic to thinking that the Fed should set targets and try to hit them. Trouble is, if it could really change things for the better, why does it put up with an 8.5% unemployment rate now – four years after the subprime crisis began? Why doesn’t it exercise its magic to bring the rate down…?
Well, we all know the answer. It can’t. Once you’ve taken interest rates down to zero…and announced that you’ll leave them there for the next three years…what more can you do? Drop money from helicopters? Right!
But no point in getting ahead of ourselves. Right now, interest rate policy doesn’t work. Because the money supply is expanded by retail and commercial bank lending, not central bank lending. The Fed lends money to the money-centre banks. They’re happy to take the Fed’s money. But that doesn’t mean they will multiply it out by risking it in the economy.
So, for the moment, they might as well set a fat goal…too…
for The Daily Reckoning Australia