After 17 straight periods in which it raised benchmark interest rates, the Federal Reserve yesterday lay doggo. Equity exchanges, bond markets, traders and economists everywhere waited for that news and then, their prayers answered, didn’t know what to make of it. The indexes fluctuated wildly and then finished, very oddly, lower across the board.
A better attitude all along would have been, “so what?” We think the Fed made the right decision in not raising the target federal funds rate again, but the reality at the moment is that its interest-rate policy has such marginal effect on economic movement that it hardly bears watching. Since the most anemic economic recovery of modern times finally gathered a little steam in 2004, the Fed raised the benchmark rates a quarter-point at a time to keep inflation at bay. Inflation still seems as dangerous as it has been at any time the past two years, maybe much more dangerous, but there are harbingers that a crueler foe, recession, is gathering his weapons.
Another quarter-percent hike in the fed funds rate would not change the inflationary forces, primarily climbing energy costs. The executive and legislative branches of the federal government could affect those forces through farsighted domestic and foreign policies, which have been absent now for six years, but we learned this week that not even Solomonic government policies can put the country wholly outside risk.
A sizable part of America’s domestic oil production will soon be halted because of miles of corroded pipeline across the Alaskan north, driving up energy prices and further imperiling the nation’s economic security. Alan Greenspan would not have had an answer for that, though he might have had the Fed raise interest rates again, just in case it might reduce demand a little and avoid igniting more inflation.
The markets may have intuited Tuesday that the decision they so wanted from the Fed — static interest rates — might not engender the continued good times they expected but rather represented a warning to get their houses in order. The Fed put out the usual happy talk, subtly boasting that its monetary policies were restraining demand and would moderate inflation pressures “over time.” It noted a “gradual” slowing of economic growth, which the Fed considers desirable.
Gradual slowing, of course, if it continues over time becomes static growth and then recession. Other indicators are not so good.
The housing boom that fueled whatever economic growth there was after 2002 is now over. People in central Arkansas find their homes on the market many months when a year ago everything was snapped up in weeks. Employment growth is back at the poor levels that appeared early in the recovery. New unemployment insurance claims are rising. Here in Arkansas, manufacturing jobs continue to disappear every month, and technology and service jobs are not replacing them any longer at a sufficient clip.
If the Fed performed a service for all of us, it was to tell us to get our houses in order. That ought to start with the national administration, but good luck with that. The message should not be lost either on state policy makers, especially those talking about cutting taxes and giving away surplus money that will soon be needed. Finally, it shouldn’t be lost on households.
