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Why Does the Fed Need to Help a “Good” Economy?
We are being told by Federal Reserve Chair Jerome Powell that our economy is “in a good place.” Some even go as far as saying that the US economy is the best in history. In reality, neither is more than a very optimistic appraisal. In 2018, the Fed raised the benchmark interest rate four times before doing a 180 in January this year, advocating for “patience.” They quickly shelved that approach and returned to adding more stimulus, lowering the federal funds rate in July and September. The Fed lowered the rates not to improve economic conditions but to prevent them from weakening due to slowing global growth, a continual trade war, and low inflation. Put simply, the Fed suggests that reinforcements are necessary to maintain the economy’s “good place.” In fact, at an event last week, Powell opened with these words: “Our job is to keep it there as long as possible.” The big question, however, is this: When maintaining a good place requires more than our central bank can offer via traditional means of financial stimulus (reduced short-term rates), what can the Fed do? Compared to other developed countries, US interest rates are higher, but the federal funds rate is quite low (between 1.75% and 2%), and the CME Fed Watch Tool expects another 25-basis-point drop at the end of October. The nominal overnight rate has, historically, been reduced by an average of 5 percentage points to fight recessions. With today’s low rates, that band-aid is unavailable. With lower positive rates out of the picture, the Fed will have to look to its other tools. Quantitative easing and negative rates are returning to the table, although they are both being reassessed in terms of effectiveness and possible negative side effects. So, what is the state of the US economy? Well, it’s not quite the greatest in our history, but some statistics do support the notion that our economy is pretty good.
- The unemployment is at a 50-year low at 3.5%,.
- The unemployment rate for African Americans and Hispanics is at a record low. (The Bureau of Labor Statistics began breaking out the numbers for these groups in the 1970s.)
- The average hourly earnings for production and nonsupervisory workers increased by 3.5% in September year-over-year, almost at the post-recession high set in August.
- The prime-age employment-to-population ratio jumped to 80.1%, which is the highest in two decades.