FOMC Down on Economy

In its policy statement released on August 9, the Federal Open Market Committee (FOMC) turned more pessimistic on the state of the economy. Apparently, Ben Bernanke and the rest of the Fed’s monetary policymakers have caught up to what many of us have been saying, at least when it comes to economic growth, or the lack thereof.

For example, the FOMC said, “Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand.”

And later: “The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.”

The FOMC reiterated its lack of concern on inflation and inflation expectations, and pledged to maintain its loose monetary policy. The FOMC said it would “keep the target range for the federal funds rate at 0 to 1/4 percent,” and maintain “low levels for the federal funds rate at least through mid-2013.”

In effect, the FOMC now sees what small business owners and job seekers have understood for some time now, i.e., that this is a terrible recovery and little reasons exists to expect a shift into a robust, sustained period of economic growth.

At the same time, with its unprecedented monetary expansion over the past nearly three years, the Fed has accomplished nothing in terms of ginning up economic and employment growth. To the contrary, economic volatility and uncertainty has been magnified due to Fed policy de-coupled from maintaining price stability. Bernanke and Company have not caught up to this policy reality, unfortunately.

And as history has shown, contrary to the Fed’s prevailing assumptions, higher inflation and slow economic growth – i.e., stagflation – can coexist, and that has been the case over much of the past year or so.

The right policy mix this economy needs is monetary policy focused on price stability, and fiscal policy focused on growth – not through bigger government, but by removing barriers to private sector growth by stabilizing and reducing tax rates, regulatory relief and opening up global markets to trade. That is, the exact opposite of the policy agenda being following for over three-and-a-half years now.

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