The Free Press, Mankato, MN

Mankato Free Press Editor's Blog

December 12, 2012

The Fed moves to enhance your economic well-being

I always feel good when I can in some way provide a service or insight to Free Press readers that will help them feel their subscription has more value than they ever thought.

I spent the better part of two years studying economics, mundane things like the production function of a manufacturing business, price elasticity of demand and that mysterious unelected institution the Federal Reserve, better known as The Fed.

So allow me to give my two cents on some recent news on The Fed reported in a fine news story by Binyamin Appelbaum of The New York Times.

Let me just say, here's a reason to read on: These guys affect your money in big ways. They affect how much you pay on your credit cards and your mortgage and they create certainty for your employer, who hopefully interprets that as a reason to keep you employed.

The story:

"The Federal Reserve said Wednesday it planned to hold short-term interest rates near zero so long as the unemployment rate remains above 6.5 percent, reinforcing its commitment to improve labor market conditions."

Comment: While the lead of this story is not remarkable by a common reading, a parenthical statement later indicates its real value. That is: The Fed is moving historically to be a "manager" of the U.S. economy, much like politicians claim to be. But the historical job of The Fed has been to manage monetary policy and only recently and again, remarkably, has it decided to a "commitment to improve labor market conditions."

The story:

"At a press conference following the announcement, Fed Chairman Ben S. Bernanke said the central bank was constrained in its ability to do more.

“If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously we would do that,”

Comment: Again, remarkable. Incredible. Historic.

The story: the last phrase at the end is the key parenthetical I was speaking of.. Emphasis is mine.

"The announcements reinforced a policy shift that began in September, when the Fed first said it would keep buying bonds until the job market improved, breaking with decades during which limiting inflation was its constant priority.

The story:

"The slow pace of inflation has made the policy shift easier. The Fed said it expects prices to rise at or below the 2 percent annual pace that it considers most healthy. But the Fed also said that it was inclined to tolerate medium-term inflation as high as 2.5 percent without breaking its focus on reducing the unemployment rate."

Comment: The Fed acknowledges its job to rein in inflation will be secondary to job creation. Again. stunning. Also a tip here folks. They fed will let inflation increase 2.5 percent without doing much. That might impact what you can buy and that price increases are likely to be tolerated.

The story:

"The targets replace the Fed’s earlier guidance that it expected interest rates to remain near zero until at least mid-2015. The Fed said, however, that it still expected to maintain its current policies until mid-2015, a strong consensus that was also on display in the economic projections of the individual officials. The economic projections showed most expect unemployment not to fall below the target of 6.5 percent before the end of 2015.

Comment: Suggests a certainty that should be helpful for business and employers.

The Story:

"The action was supported by 11 members of the committee, led by its chairman, Ben S. Bernanke. The only dissent came from Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, who has repeatedly called for the Fed to do less."

Comment: Bernanke's got a strong coalition. More certainty for us.

Story: "The Fed announced in September that it would expand its holdings of mortgage-backed securities by about $40 billion a month until the outlook for the job market showed “sustained improvement,” the first time that it had announced economic objectives for an aid program, rather than a fixed timetable"

Comment: Again. Clear indication it considers its role economic policy, not just monetary policy.

The story: "A number of Fed officials have said in recent weeks that they see clear evidence the new mortgage purchases are reducing interest rates for borrowers." ..."The purchases allow the Fed to target interest rates in a critical economic sector. Fed Governor Jeremy Stein also argued recently that reducing the cost of mortgage loans has a larger economic impact than reducing the cost of corporate borrowing because people are more likely to take the money that they save and spend it."

Comment: This is clearly a kind of monetary policy via Keynsian economics. Give people money, the middle class, and they'll spend it to spur the economy. Who needs another Obama stimulus program when you've got friends like The Fed? Again. Remarkable.

Ultimately, The Fed clearly could have more control over our economy than any administration or Congress. And again, they don't have to run for election every two years. Maybe they're just doing this to show Ron Paul who's boss.

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