As I wrote recently in “The Fed Has Already Imposed a ‘Cyprus Tax’ On U.S. Savers” the impact of the Fed’s zero interest rate policy is not achieving the Fed’s stated goals.
“The problem is that the actions of by the Fed are having the opposite of the intended effect. If you refer back to the chart above you will see that economic growth, savings, and incomes have all declined as the Fed has continually driven rates lower. Lower interest rates have not the boon of economic prosperity as advertised. What history does show is that higher levels of personal savings are necessary to support productive investment which leads to economic growth rates.”
Secondly, while the unemployment “rate” is declining, it is a very poor measure from which to benchmark the health of the economy. The drop in unemployment is primarily due to temporary hires, labor hoarding and falling labor participation rates. As shown below – real full-time employment as a percentage of the working population shows that employment has only marginally increased since the financial crisis. The drop in jobless claims does not necessarily represent an increasing employment picture but rather labor hoarding by companies after deep levels of employment reductions over the past 4 years.
David Merkel recently summed this up best stating:
I really think the FOMC lives in a fantasy world. The economy is not improving materially, and inflation is rising. Note that the CPI is close their 2.5% line in the sand. TIPS-implied inflation 1X1 (one year ahead for one year) is 2.32%, and 5X5 is around 2.86% annualized.
Current proposed policy is an exercise in wishful thinking. Monetary policy does not work in reducing unemployment, and I think we should end the charade.
In my opinion, I don’t think holding down longer-term rates on the highest-quality debt will have any impact on lower quality debts, which is where most of the economy finances itself. When this policy doesn’t work, what will they do?
GDP growth is not improving much if at all, and the unemployment rate improvement comes more from discouraged workers.