The Federal Reserve Board’s Open Market Committee met last week for the first time since raising interest rates in December and then published its usual policy statement full of mush.
It could have been written by Russia’s politburo. It’s loaded with statements like this one: “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
In other words, if we’re not already in a recession, we’re pretty close to one, so the Fed is not going to raise rates to normal levels anytime soon. 
We’ll spare you the rest of the policy statement, which can be summed up as follows: “Blah, blah, blah.” If the Fed were being honest, here’s what the latest policy statement would have said:
Well, that was a disaster.
We’ve been hearing for years that it was time to raise interest rates. Virtually every economist on the planet, not to mention all of the journalists who think they understand the economy, had been predicting that the Fed would raise interest rates in December.
What choice did we have? We had seven years of zero interest rate policy (ZIRP) and it can’t go on forever.
So we raised rates and, since then, we’ve had nothing but regret. For 2016, the stock market is off to its worst start in history, the economy is barely growing and the dollar is strengthening to the point where any company that’s counting on exports to boost profits can forget about it. Even before we raised rates, profits were plummeting, so now corporate America is in real trouble.
You can also forget about our 2% inflation goal. A strong dollar is going to make imports cheap, cheap, cheap. It’s bad enough that American companies aren’t going to be able to sell abroad. They’re also going to have to drop their prices domestically just to compete. Profits will drop even further and the 2% growth we’ve had throughout the current “recovery” will look good in comparison to what lies ahead.
At least consumers will benefit from lower prices. But really … can oil prices go much lower?
Someday the economy will improve to the point where the inflation rate jumps to 2%, but it’s not going to happen anytime soon. When it does, though, we will take credit for it. Mission accomplished, as W. once said!
Of course, the real reason for all of that bond buying and easy money shenanigans we went through with ZIRP was to jack up the stock market, not to lower unemployment or keep inflation in line with some arbitrary goal that has little to do with economic health.
And you have to admit, we did a pretty good job. It’s too bad we can’t boost stock prices forever; at least some Americans benefited from our efforts.
Now, though, investors are paying the price. I can’t say what’s going to happen for the rest of the year, but gold is looking pretty good again.
We’re usually optimists around here and forecast economic growth rates that are much higher than we typically get. That’s because if we say what’s really happening, investors will freak! So when the Fed predicts growth in gross domestic product (GDP) of about 2% for at least the next four years, you know we’re all in trouble. You can just imagine what to expect and it won’t be good.
It’s important to put things in perspective. The Fed can only do so much. We can increase or decrease the money supply and that’s about it. We increased the money supply by buying $3.5 trillion worth of bonds and now we’re not sure what to do with all of those bonds.
Given our limitations, it would be foolish to expect the Fed to singlehandedly save the economy. We need help, but President Obama and Congress have only made matters worse. The only thing breaking production records in this country is the volume of new regulations.
Meanwhile, President Obama and Treasury Secretary Jack Lew want to punish American companies that move their headquarters elsewhere. America’s corporate tax rate is about 35%. Ireland’s is 12.5%. Where would you move your business? It’s surprising that shareholders of every public company aren’t insisting that the company move to another country.
We were hoping for a soft landing. We wanted to raise interest rates gradually and in a way that would have little impact on the economy.
Now, though, it looks like we’re in for a hard landing. But don’t blame us. We just control the money supply, not the economy.
No one was surprised that the Fed didn’t raise interest rates at its January meeting. Many are predicting that we will raise rates in March. How do they know when we don’t?