FED WATCH: Keating Comments on Latest FOMC Statement

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), issued the following response to the Federal Open Market Committee’s statement on August 1:

“The FOMC’s statement today was more of the same. The Fed effectively warned that economic and employment growth would continue to under-perform for the foreseeable future, and Bernanke & Company would continue running loose money.

“So, the message is that the economic fiction the Fed has been operating under for four years now will persist. It’s the Bernanke Fed’s misguided policies, and they’re sticking to them.

“The reality, of course, is that the Fed’s previously unimaginable expansiveness on monetary policy has done nothing to strengthen this anemic recovery. And no reasons exist to think that even more easing by the Fed will help growth.

“Instead, loose monetary policy has only created negatives and uncertainties regarding the dollar and inflation. Entrepreneurs and investors continue to face nothing but negatives and uncertainties on the policy front – from worries over taxes, regulations and government spending on the fiscal side to the actual and potential grim consequences of loose money.

“Among those consequences of such expansive monetary policy, by the way, are higher energy costs given that oil is priced in dollars. When the value of the dollar and inflation are concerns, that serves to push oil prices higher than they otherwise would be.

“A shift to sound monetary policy focused on price stability would be a welcome change for small businesses and the economy, but the Bernanke Fed is uninterested in shifting policy in such a direction.”

Bernanke, the FOMC and Two Cliffs

The Federal Open Market Committee issued its statement on interest rates, the economy and monetary policy on April 25, and did not offer any surprises. 

The FOMC sees the economy “expanding moderately,” and sometime in the future, expects it “to pick up gradually.”

 

As for inflation, no real concerns could be detected. The FOMC stated, “Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline. However, longer-term inflation expectations have remained stable.”

 

And as for policy, it was no change. The FOMC said that it “expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

 

Meanwhile, in his press conference, Fed Chairman Ben Bernanke did warn lawmakers about a “fiscal cliff” at the end of this year if all of the scheduled tax increases and government spending cuts were to go into effect. He said “that would be a significant risk to the recovery.” As The Wall Street Journal reported, “If lawmakers allow the tax cuts to expire and the spending cuts to take effect, ‘there is absolutely no chance that the Federal Reserve would be able to have the ability whatsoever to offset that effect on the economy,’ Mr. Bernanke said at a news conference Wednesday, following a two-day meeting of the Fed's policy-making committee.”

 

Actually, the economy faces two possible cliffs.

 

Bernanke is half right about the fiscal cliff. Scheduled tax increases for next year create uncertainty now, and would deal a devastating blow to entrepreneurship, investment and the economy if allowed to go into effect. At the very least, Congress needs to make the 2001/2003 tax relief measures permanent, and repeal the scheduled ObamaCare tax increases.

 

As for government spending cuts, however, those actually would not have a negative impact on the economy, contrary to what is alleged by the Keynesian thinking prevailing among the Obama administration, many in the media, and apparently, Ben Bernanke. Reining in federal spending means leaving resources in the private sector, where they would be used far more productively.

 

But Bernanke does not want to talk about the monetary cliff that stands as another major risk or threat to the economy.

 

The Fed chairman has chosen to ignore the straightforward economic reality that inflation always is a monetary phenomenon. That goes for the stepped-up inflation we have experienced since late 2010. This recent inflation and the risk of going off a monetary cliff go to the troubling challenge that Fed opened the monetary floodgates in late summer 2008 in way that was never done before, and has only taken very minor breathers since. That translates into a very real threat of much higher inflation.

 

Policymakers need to step back from these dangerous cliffs, and that includes the Federal Reserve getting back to focusing on price stability, rather than trying to manipulate the economy due in large part to trying to counter bad spending, tax, and regulatory policies. When the Fed loses sight of price stability, and tries to gin up or prop up the economy, that effort not only fails (as we have seen), but it also creates additional risks.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

SBE Council Economist on Latest Inflation Numbers and Fed Policy

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), offered the following statement in reaction to the CPI inflation numbers released on October 19 by the U.S. Bureau of Labor Statistics:

"Nothing positive could be found in the CPI inflation data released today. The CPI Index increased by 0.3 percent in September. Looking at the past three months, annualized inflation ran at about 4.8 percent. For the past year, inflation hit 3.9 percent.

"Ben Bernanke and his colleagues at the Federal Reserve need to wake up. It's time to remember and act according to some basic economic realities. First, inflation ultimately is a monetary phenomenon, so fingers cannot be pointed anywhere else on this increase in inflation.

"Second, the unprecedented loose monetary policy that the Fed has been running for three years now has done nothing to aid real economic growth. That's not surprising, since individuals, investors and business owners understand that this is government trying to manipulate the economy with no real, lasting impact on income or wealth. To the contrary, given the resulting inflation, real income and wealth ultimately will suffer due to loose monetary policy.

"Third, in order to avoid matters getting worse, the Fed needs to refocus on price stability, which both in the near term and over the long haul will be far more beneficial for the economy."

SBE Council Economist on Latest Inflation Numbers

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), offered the following statement in reaction to the CPI inflation numbers released this morning by the U.S. Bureau of Labor Statistics:

"Despite the continuing efforts by Fed Chairman Ben Bernanke to reassure that everything is under control regarding inflation, the CPI inflation data for August, up 0.4%, and the past year, running at 3.8%, confirm that this is simply not the case.

"Since the Fed has been running incredibly loose monetary policy for the past three years, no one should be surprised that inflation is running hot. Meanwhile, the Fed's open monetary spigot has accomplished nothing in terms of getting the economy moving.

"These inflation numbers provide a disturbing reminder that, yes, inflation can accelerate in a down economy. It's called stagflation.It might not be treasonous, as Texas Governor Rick Perry offhandedly said, but it sure is bad economics, with grim consequences for the nation."

Bernanke in Jackson Hole

The Federal Reserve long ago was out of economic growth bullets - if it ever had any in its monetary policy gun in the first place. It seems that even Fed Chairman Ben Bernanke is coming to this realization.

In his speech in Jackson Hole, Wyoming, on August 26, Bernanke had nothing to say that staked out new ground on the economy or monetary policy.

For example, despite the recent increase in inflation, and worries among business owners and investors about the threat of future inflation, the Chairman reiterated his unwavering optimism on inflation: "With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate."

Let's hope Bernanke is right, but unprecedented expansive monetary policy over the past three years indicates otherwise.

Bernanke also renewed his declaration about the Fed standing ready to do more. He said, "In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion."

However, a bit of recognition regarding the limits of monetary policy crept into his speech.

He noted that "most of the economic policies that support robust economic growth in the long run are outside the province of the central bank." For good measure, he added: "Fiscal policymakers can also promote stronger economic performance through the design of tax policies and spending programs. To the fullest extent possible, our nation's tax and spending policies should increase incentives to work and to save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. We cannot expect our economy to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face."

Whether in the short term or over the long haul, monetary policy should be focused on price stability. It is ill suited as a tool to generate economic growth. The Fed gets caught in a start-stop game of trying to gin up growth, and then trying to stop inflation.

Bernanke got monetary policy right at one point in his speech: "The Federal Reserve has a role in promoting the longer-term performance of the economy. Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability. Low and stable inflation improves the functioning of markets, making them more effective at allocating resources; and it allows households and businesses to plan for the future without having to be unduly concerned with unpredictable movements in the general level of prices." If only he'd take his own advise in this case.

At the same time, fiscal policy can work to aid economic growth. But it has to be the right policies. More government spending simply winds up hurting the economy by diverting resources form productive private sector ventures. Instead, what's needed is a combination of tax relief, deregulation, reined in government spending, and free trade.

What the economy needs now - and has needed for some time now - are pro-growth fiscal policies and anti-inflation monetary policy, but unfortunately, we have gotten the opposite. And we've paid dearly as a result.

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

"What Planet is Ben Bernanke Living On?" - SBE Council Economist on Latest Inflation Numbers

Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council (SBE Council), offered the following statement in reaction to the CPI inflation numbers released this morning by the U.S. Bureau of Labor Statistics:

"What economic planet is Fed Chairman Ben Bernanke living on? The FOMC declared on Tuesday that longer term inflation expectations remain stable and underlying inflation pressures are subdued. Really?

"The latest data show that CPI inflation hit a hot 0.5% in February. Over the past six months, annualized inflation came in at 3.6%, and over the past three months, the annualized inflation rate reached 5.2%.

"While Ben Bernanke would like to point blame elsewhere, in the end, inflation is always a monetary phenomenon, that is, a failure of monetary policy. The Fed has been running historically loose monetary policy since September 2008, and pledges to continue to do so. No one should be surprised that inflation has picked up, and little reason exists to expect future inflation to be tame given that the key underlying inflation pressure is overly expansive monetary policy."