PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Two Takeaways: The Fed Stays Put on Interest Rates

By at 18 September, 2015, 8:02 am

Federal Reserve

by Raymond J. Keating-

In its statement released on September 17, the Federal Open Market Committee decided to stand pat on interest rates, that is, to continue with the federal funds rate in a targeted range of 0.0% to 0.25%, as has been the case since December 2008.

What does this mean for small business? Well, not much in the near term, in the sense that it is more of the same.

Beyond the immediate consequences (or lack thereof) of this no-move decision, however, one is reminded of two major problems, or takeaways, in terms of public policy and the economy.

Monetary Policy as a Means to Stimulate the Economy

First, the Fed has maneuvered itself into a no-win situation by trying to use monetary policy as a means for attempting to stimulate the economy. As noted in a recent SBE Council Cybercolumn, the Fed is continuing to run “historically loose (previously unimaginable) monetary policy for the foreseeable future.

Consider that the monetary base stood at $4.06 trillion in early September, with total bank reserves at $2.74 trillion. That compares to the monetary base standing at roughly $840 billion in July 2008, with bank reserves at a mere $45 billion.” The futile hope has been that this loose money experiment would boost the economy without any negative ramifications. Some even say that the Fed has accomplished this goal. But that’s not supported by the reality that the Great Recession has been followed by the worst recovery on record since at least the Great Depression.

The Fed’s loose money has been all about added uncertainty for businesses and investors, not about saving us from another depression.

The Role of Other Government Policies

Second, the last eight years have marked an incredible period whereby tax and regulatory burdens have been increased dramatically during an already bad economy, along with tepid leadership on trade policy and expanded government spending. That is, fiscal policymaking has been explicitly anti-growth. Why is anyone surprised then that we’ve experienced miserable rates of growth?

Again, these policies have increased costs and created uncertainties, doing real damage to entrepreneurship, business investment, economic growth and job creation. That is, these policies did not save the economy, but undermined it.

Some have argued that this anti-growth fiscal policy has forced the Fed to try to stimulate the economy via monetary policy. Unfortunately, that’s not what monetary policy does.

So, does the Fed need to rein in monetary policy? Of course, it does. But the U.S. also desperately needs substantive, permanent tax and regulatory relief, and true commitment and leadership on reducing barriers to international trade.

The combination is straightforward: We need pro-growth incentives for the private sector, and monetary policy focused on price stability. When that is the policy mix, no reason exists why the U.S. economy cannot grow at a robust pace.

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

 

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