PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Fed’s Positive Take on the Economy

By at 13 December, 2017, 5:30 pm

 

by Raymond J. Keating-

The Federal Open Market Committee (FOMC) announced today that it has decided to inch up the federal funds rate from the 1.00%-to-1.25% range to 1.25%-to-1.50%.

In terms of the impact of such a rate increase on economic activity, there effectively is none. The fed funds rate remains well below the historical norm. For example, from 1992 to 2007 (prior to this last recession), the fed funds rate averaged just over 4%.

For good measure, when talk among experts focuses on so-called Fed tightening, there has been no shrinking in 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). The monetary base skyrocketed from $875 billion in August 2008 to $4.2 trillion in September 2015 – and subsequently it has wandered, with the November level registering $3.9 trillion. At the same time, bank reserves jumped from a mere $11.7 billion in late August 2008 to $2.8 trillion in mid-2014, and registering $2.3 trillion in November of this year. That speaks to Fed policy having little real effect on the economy – except, as we have argued before, for actually increasing uncertainty given that this monetary expansion is without any precedent in U.S. economic history, and there seems to be no clear plan for reining in this vast monetary expansion. Over the longer haul, the risk clearly lies on the side of inflation eventually running higher. (See the latest report on CPI inflation from the U.S. Bureau of Labor Statistics.) Indeed, it is an understatement for the FOMC to declare, “The stance of monetary policy remains accommodative…”

More immediate is the FOMC’s take on the economy. It was pointed out “that economic activity has been rising at a solid rate” and “job gains have been solid.” In addition, it was noted that “growth in business fixed investment has picked up in recent quarters.” And, again, all of this despite, not because of, the uncertainties created by monetary policy.

These assessments from the Fed on jobs, investment and economic growth reinforce other positive measures on the current economy.

Looking ahead, the overall economy would benefit from the Fed getting re-focused on exclusively maintaining price stability, with tax and regulatory policies, for example, focused on rolling back burdens, and incentivizing working, saving, investing, and starting up and building businesses.

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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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