PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Fed’s Rate Hike

By at 16 March, 2017, 8:20 am

 

by Raymond J. Keating-

On March 15, the Federal Reserve decided to up the range of the federal funds rate by a quarter point to ¾ to 1 percent. This was expected by the market and in policy circles, and it amounts to having little economic effect in the short run.

After all, as noted in the Federal Open Market Committee March 15 statement, “The stance of monetary policy remains accommodative…” Indeed, the question is: where are things headed now that the Fed has been running loose money without historical precedent since the summer of 2008?

Keep in mind that the monetary base (that is, the sum of currency in circulation and reserve balances, which deposits held by banks and other depository institutions in their accounts at the Federal Reserve) skyrocketed from $875 billion in August 2008 to $4.2 trillion in September 2015 – and then declining to $3.4 trillion in early January 2017. Some call this recent decline in the monetary base as evidence of a “passive tightening” – though the base has climbed back to $3.8 trillion in early March.

By the way, if it had grown at a rate along the lines of the historical norm since August 2008, the monetary base would be at $1.7 trillion now as opposed to that $3.8 trillion. The $2.1 trillion difference here, incidentally, equals the level of excess bank reserves (that is, the level of bank reserve above the required balance).

So, the case can be made that the Fed’s loose money actions over the past nine-plus years has amounted to nothing positive – while creating uncertainty in the economy – and the Fed still remains accommodative given the sky-high level of the monetary base.

The Fed’s Economic Projections

Looking ahead, the Fed issued its latest projections on the economy, and they remain grim for the short term and over the long haul. The range of projections on real GDP growth for 2017 is 1.7 percent to 2.3 percent, 2018 is 1.7 percent to 2.4 percent, and 2019 is 1.5 percent to 2.2 percent.

Over the long run, the range for projected growth is 1.6 percent to 2.2 percent. That would be more of the same dismal growth that we have experienced throughout this pathetic period of recovery/expansion that started in mid-2009. This big problem is that trying to project economic growth beyond a year or so out is a very dicey proposition given that major public policy changes can be implemented, for better or for worse, that can have significant effects on growth. Also, private-sector entrepreneurship and innovation serve as significant unknowns as to where the economy is headed.

In the end, all that government policymakers can do is provide a sound foundation upon which growth can flourish. That not only includes pro-growth changes in tax and regulatory policies, reining in the size of government, and expanding free trade, but also running monetary policy focused on price stability.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

 

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