NewsNM note (Spence) - The primary objective of the Federal Reserve Board's near zero interest rate policy is to keep borrowing costs low for the federal government. The policy has a fatal flaw. It robs savers and bond buyers of a decent rate of return. The effects of a zero investment return policy has had a significant impact on the broad stock market. Yesterday the Standard and Poors 500 index finished the year of 2011 virtually exactly where it started. It lost 0.003 percent in 2011. Below is my column from earlier in the week regarding the economy, politicians, and the Fed's policy signals.
The Fed Will Signal When the Economy is Recovering
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| Ben Bernanke |
There is a politician proof way to determine if the U.S. economy is really improving. It is better than listening to the coming pre-election chatter. Simply keep an eye on the Federal Reserve Board’s interest rate policy, especially if you are relying on interest income to pay your bills. The Fed’s actions will speak much louder than all politician words.
The Fed’s current policy is to force all savers to settle for virtually no return whatsoever on their savings. And with the Fed’s near zero interest rate policy, which has been in place since 2008, we have the facts we need to understand exactly what people in possession of relevant economic data think of the U.S. economy. The Fed has been keeping rates low for what it thinks are good reasons. It is going out of its mind trying to “help” a rotten U.S. economy.
Still, Fed watchers hear Chairman Ben Bernanke regularly extol the virtues of a low interest rate policy in his speeches. When he does so it is important to realize that low rates do not help most people who need to borrow or lend. Few citizens and very few small businesses can take advantage of 1-2% interest rates. Only the federal government, huge publicly traded companies, and well-reserved home owners using Fannie Mae and Freddie Mac enjoy the fruits of borrowing at low rates. By and large, small businesses and individuals daring enough to borrow, and willing enough to risk going into debt, are forced to shoulder the burden of 6-8% commercial loan rates, if not higher. And regulator-weary community bankers are routinely forced into a policy of being not very willing to lend to anyone who truly needs money even at 6-8%. Naturally the Fed does not spend much time talking about these realities or the fact that savers are getting the shaft. They would have us believe low rates are a magic economic tonic for our economy.
There is more. Most banks, contrary to popular belief, are actually losing money on short term deposits, thanks to a miniscule overnight Fed Funds rate which is also determined by the Federal Reserve Board.
The year 2012 offers Americans great certainty. It is a virtual certainty that Democrats will blame all bad news related to the economy on Republicans. It is also quite certain Democrats will try to simultaneously take credit for any good news on the economy. On the other hand, the GOP will most certainly downplay any improvements in the economy. And the GOP will surely blame the Democrat’s policies of big government-run healthcare, banking, green energy “investments,” and affordable energy disinvestments, for our terrible economy and high unemployment rate.
The bottom line for truth seeking Americans is pretty simple. The Fed will let us know when sustained job creation and the prosperity associated with real economic expansion takes hold. It will be when the Federal Reserve, not politicians seeking affirmation, shows appropriate confidence by changing its interest rate policy. In the meantime, if you, like millions of Americans haven’t benefitted over the last three years from the near zero interest rate environment created by the Fed, don’t assume the country is back on the right track, no matter what any politician tries to tell you. Politicians are master manipulators. Fed monetary policies offer the closest thing to the truth about what the government’s data tells us about a rebound in our economy.
Stock Market Flat in 2011
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