Tuesday, December 15, 2015

Fed ‘Stimulus’ Has Made Inequality Worse, Hurt Economic Growth

It appears the Federal Open Market Committee will vote at next week’s meeting to raise short-term interest rates by one-quarter of a percentage point. Never have so many waited so long for so little.

Interest rates are likely to remain at historically low levels for some time, perhaps years. It is worthwhile to consider what the economic effects have been and will likely be in the future in the context of the political debate of the 99% versus the 1%.

Fed monetary stimulus did not stimulate the economy. By almost any measure, this has been a notably weak economic recovery.

Monetary policy has certainly buoyed the stock and bond markets, benefiting the ever-decreasing percentage of Americans owning such financial assets. In doing so, the Fed’s policy has done much to benefit the top 1% of the income distribution but little for the American public as a whole.


The problem of slow growth and rising income inequality are two sides of the same coin. And bad central bank policy has contributed to both.”
First, the ZIRP (zero interest rate policy) supports bubbles in equity and bond markets. If a bubble is a rise in asset prices that cannot be sustained, the bond market qualifies as one almost by definition.

Elevated bond prices depend on the continuation of ZIRP. How much of the elevated equity prices is due to fundamentals rather than Fed policy will be revealed after the fact. But we suspect that ZIRP has directed capital into stock buybacks, initial public offerings, and mergers and acquisitions at the expense of real productive investments.

http://www.cato.org/publications/commentary/fed-stimulus-has-made-inequality-worse-hurt-economic-growth

No comments: