PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

The Fed’s Presumptuousness and Outlook on the Economy

By at 21 June, 2019, 8:10 am

by Raymond J. Keating-

Politics – especially as it is played in Washington, D.C. – is filled with people who overestimate their importance. That’s true of officials at the Federal Reserve, as illustrated in the following from the Federal Open Market Committee statement released on June 19:

“… the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion…”

The only contribution that the Fed makes to the nation’s economic well-being is by running monetary policy that results in price stability. Anything more than that is simply presumptuous. Indeed, when the Fed ventures away from the goal of price stability is when monetary policy creates problems. For example, the unprecedented loose money operated by the Fed for nearly a decade starting in late summer of 2008 created additional uncertainty for investors, entrepreneurs and businesses, while doing absolutely nothing to boost economic growth.

Beyond the Fed thinking that it can manage the economy, however, did the FOMC statement include anything of interest as to where the economy stands?

The Fed sees a labor market with continuing strength – with “solid” job gains – and economic activity “rising at a moderate rate.”

Recent GDP data have shown a slowing in personal consumption expenditures in the last two quarters (first quarter 2019 and fourth quarter 2018), and nonresidential (business) investment sluggish in two of the last three quarters. Regarding these two areas of importance for economic growth, the Fed notes that “household spending appears to have picked up from earlier in the year,” but “indicators of business fixed investment have been soft.”

If the Fed’s assessment turns out to be accurate for the second quarter, that would mean investment under-performing in three of the last four quarters – which would be troubling given the importance of business investment to current and future economic growth.

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

 

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