Cogito Ergo Non Serviam

Fed Won't Hike Rates Till Late 2014

The US Federal Reserve has announced that it will keep the benchmark Fed Funds rate at almost zero until late 2014. Moreover, the Fed may engage in further quantitative easing to get the economy moving, "I don't think we're ready to declare that we've entered a new, stronger phase at this point," Chairman Ben Bernanke said. "If the situation continues with inflation below target and unemployment declining at a rate which is very, very slow, then ... the logic of our framework says we should be looking for ways to do more." This means inflation, while not dead, is hardly a concern, the US economy is going to grow anemically for quite some time yet, and the Fed will use what few tools it has left to boost that growth.

For the first time ever, the Fed also made explicit and formal that it targets the "ideal" inflation rate at 2% based on the personal consumption expenditure (PCE) index. Until now, it merely referred to a range of 1.7-2%. At the same time, the Fed declined to set an acceptable rate of unemployment, claiming there was too much involved in employment that the Fed could not control. More likely, these bankers and financiers simply can not decide whether 4% or 5% joblessness is acceptable and have not been academically nor professionally trained to care.

The most important thing that Mr. Bernanke and crew have said in their statement is "we should be looking for ways to do more." With interest rates at zero, the central bank has a couple of other things it can do, and the market's consensus is for a third round of quantitative easing, QE3 as it is known. This is simply increasing the number of dollars in the system. Reuters quoted a note by Michael Feroli, chief US economist at JP Morgan, "Probably the main take-away from the press conference is the sense conveyed by Bernanke that it would not take much of a disappointment in growth or inflation to get the Fed to start another round of QE. In fact, from his answers it's not even clear any disappointment would be necessary to see more QE."

The truth is that the future of the US economy is one of slow growth because the nation is still trying to get a handle on its debt situation. While the private sector pays down debt, it doesn't spend on other things to boost demand. Low demand is the very definition of a sluggish economy. Those who talk about closing the output gap by above-trend growth in the future now seem to be talking about 2015. That is a lifetime in the financial world.

On the whole, however, this new openness at the Fed is welcome. The big complaint that business leaders have had recently is the uncertainty in the market. While much of that is uncertainty over government policy on taxation and such, the fact that the world now knows that US interest rates are going to stay more or less where they are for a couple of years can only help.

© Copyright 2011 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.



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