PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Fed, Economy and Monetary Policy

By at 28 September, 2018, 8:58 am

 

by Raymond J. Keating-

The Federal Reserve served up its latest statement on monetary policy and the economy on September 26. The main gist: the current economy is strong, and the Fed is further inching up short-term interest rates, i.e., the federal funds rate.

Specifically, the Fed moved the feds funds rate up by a quarter point, with the new target range being 2 percent to 2.25 percent. For good measure, much has been made of the FOMC statement no longer noting that monetary policy continues to be “accommodative,” with much debate over what it means. If there is something significant to be taken from this change in terminology, it most likely refers to the fact that the Fed has been reining in the monetary base (currency in circulation plus bank reserves) for the past year. At the same time, the monetary base remains at a level unprecedented in the pre-2008 economy – leaving work still to be done on this front.

Meanwhile, the FOMC statement makes clear that the Fed sees strong growth and low inflation currently:

“Information received since the Federal Open Market Committee met in August indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.”

As for where the economy might be headed, the Fed’s somber assessment of weak economic growth over the long run persists. For example, the median forecast among Fed members and presidents predicts real GDP growth of 3.1 percent in 2018, followed by 2.5 percent in 2019, 2.0 percent in 2020, 1.8 percent in 2021, and 1.8 percent persisting over the longer run.

Of course, such pessimism fails to line up with the post-WWII U.S. economy, though it does line up with the numbers for the past decade-plus. Predicting future economic growth is a hazardous undertaking, to say the least, but we do know that economic growth is tied to a variety of factors, including tax, regulatory, trade and government spending policies; monetary policy; protection of private property; levels of entrepreneurship, investment, innovation and productivity; population growth; and much more.

On the policy front, we’re seeing that positive changes in tax and regulatory policies can make a real difference in terms of investment and growth. If further pro-growth tax and regulatory policies are implemented, along with policies like sound money, expanding free trade, immigration reforms reflecting economic reality, and reining in government spending, no reason exists why the U.S. should not get back to 3 percent to 4.5 percent growth, on average, during non-recession periods, coupled with low inflation.

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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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