Fed’s latest statement much ado about nothing

Raymond Keating
Raymond Keating

Since the start of this year, at least, much speculation has swirled about when the Federal Reserve would finally increase short-term interest rates. To paraphrase Shakespeare, it’s much ado about nothing. Actually, that would be a best-case assessment.

The Federal Open Market Committee served up assorted points on the economy and monetary policy in its latest statement. But three points are worth highlighting”

The economy: First, it was written in the FOMC statement: “Information received since the Federal Open Market Committee met in April suggests that economic activity has been expanding moderately after having changed little during the first quarter.”

If correct, that would point to the continuation of a recovery featuring poor-to-mediocre economic growth.
That is, this grossly under-performing recovery continues to under-perform.

Business investment: Second, the FOMC stated, “Growth in household spending has been moderate and the housing sector has shown some improvement. However, business fixed investment and net exports stayed soft.”

This is particularly troubling given that poor business investment has been and continues to be a central problem in our economy — indeed, dating back to 2007. Until private business investment grows at a strong and sustained pace, the overall economy will remain sluggish, at best.

Effectiveness of Fed policy: Third, regarding the supposed big questions on the Fed and interest rates, it was noted in the FOMC statement: “To support continued progress toward maximum employment and price stability, the committee today reaffirmed its view that the current 0 to 0.25 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the committee will assess progress — both realized and expected — toward its objectives of maximum employment and 2 percent inflation.”

By doing nothing on interest rates, the FOMC sends a clear signal that the economy, in fact, continues to lack strength. In turn, the dismal economy of the past seven to eight years shows that the Fed’s historically loose monetary policy not only has done nothing to boost growth, but has undermined growth — including entrepreneurship and investment — by creating significant uncertainty.

Indeed, the best-case scenario is that Fed policy does not matter at this point in time. More likely, the Fed’s continuing loose-money escapades stand as an economic negative.