From MarketWatch 12/10/15
Central bank is handling U.S. economic growth brilliantly
Higher interest rates are coming, and no one can deny it.
The November jobs report last week affirmed the strength of the recovery as once again the U.S. added more than 200,000 jobs to more than absorb new entries to the workforce and help push the nation’s unemployment rate even lower.
Also last week, Federal Reserve Chairwoman Janet Yellen said she was “looking forward” to when the Fed “begins to normalize the stance of policy” and that “doing so will be a testament … to how far our economy has come.”
The table is set for the first increase in U.S. interest rates in more than nine years, and should be heralded as a huge vote of confidence — something that, like Janet Yellen, all investors should look forward to.
Yet detractors of the Fed often grossly misunderstand how the institution works. “It’s almost as if the Fed were designed to confound explanation of it,” Adam Davidson wrote recently in a New York Times Magazine with the pithy title “You’re Not Supposed to Understand the Federal Reserve.”
There are a lot of scare tactics and downright lies out there regarding how the Federal Reserve operates. Here are a few facts to add some clarity:
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- The Fed is not a political body: Central bankers are not politicians. The Federal Reserve Board of Governors consists of seven members who typically are trained as economists and were appointed by the president and confirmed by the Senate. These are bankers and academics called to serve this institution in much the way great lawyers and judges make their way to the Supreme Court.
- The Fed’s power is decentralized: Even if you want to claim those seven Fed governors are political, the FOMC meeting this month — that is, the Federal Open Market Committee — is actually made up of 12 people. These other five are rotating members chosen from 12 regional central banks. There is, in fact, no big bad bank at the middle, but rather the governors and a few representatives of various regional reserve banks. I suppose it’s possible for some corporate interest to corrupt this strange system, but it would be incredibly complicated given the decentralized nature of our ironically named central banking system.
- The Fed is scrutinized:: It’s fashionable to claim that we should “audit the Fed,” and that the institution is afraid of transparency. But the Fed is already audited several times a year — internally, by an external independent audit firm and by the Government Accountability Office among other institutions. It also publishes its balance sheet weekly (view it here) and now holds regular press conferences after former Chairman Ben Bernanke initiated the practice back in 2011 at the behest of those advocating for even more visibility into how the central bank works.
The Fed is simply crushing it when it comes to fulfilling its dual mandate.
Still, as with so many things that inflame base political passions, detractors of the Fed tend to dismiss these facts out of hand. They should quit whining and thank the Fed.
The Fed helps America
The more I learn about the Fed, the more I am in awe of these people whose tireless work supports the U.S. economy in subtle and complex ways. The most important facts speak directly to the central bank’s so-called dual mandate of “maximum employment” and “stable prices” as outlined in the 1977 amendment to the Federal Reserve act.
Inflation is not a problem: According to the Bureau of Labor Statistics, the current rate of inflation is running at an anemic 0.2%. That measly rate is actually much better than the deflation we had been seeing at the start of 2015. If you think inflation is a problem, you’re not paying attention.
The U.S. Dollar is strong: Some Fed haters talk about the “death of the dollar” and a weak U.S. currency thanks to our loose monetary policy. But in fact, the dollar DXY, +0.55% is much stronger than other currencies. Take the U.S. dollar index, which measures the greenback vs. a basket of foreign currencies including the Japanese yen, the British pound and the Swiss franc, among others. This dollar index is actually up by about 12% in the past year and almost 25% in the last two years. So don’t talk about a weak dollar, because that is simply not accurate.
The job market is healing: The unemployment rate is less than half its crisis-era high, down to just 5.0% in the latest numbers as the economy added 211,000 jobs last month. This is an amazing feat, and means the U.S. is adding jobs not just to absorb young grads entering the workforce but also to provide opportunities to those currently unemployed. Keep in mind that a 0% unemployment rate is not possible, and many economists and officials actually think that the economy has been at or near full employment for most of the year.
With all this at context, the Fed is simply crushing it when it comes to fulfilling its dual mandate.
Now, some detractors will state that the Fed has another obligation — namely, to keep rates in a good place. In fact, the aforementioned Federal Reserve Act amendment explicitly mentions “moderate long-term interest rates.”
That was exactly the case Ralph Nader brought up when he penned an open letter to Janet Yellen recently. However, the key phrase is “long-term” and everyone needs to keep in mind that the gains made on jobs and economic growth — modest though they may be compared with the boom times — would have been undercut by a short-term goal of boosting rates just to appease savers.
In fact, the Fed chairwoman defended the institution’s choice to keep rates low in her own letter. “An overly aggressive increase in rates would at most benefit savers only temporarily,” she wrote. “Rather, it would undercut the economic expansion, necessitating a lasting return to low interest rates.”
If you think the Fed is punishing savers on purpose, you’re missing the point.
Look at how far the economy has come. And look at how the Fed, despite increased scrutiny and illogical criticism, has been a steady hand through it all.
Moreover, the stock market is up more than 200% from its 2009 lows and about 35% above its 2007 highs.
So stop whining about Janet Yellen and her colleagues. If anything, we should give them a round of applause.