BREAKINGVIEWS-Fed's extraordinary policy risks becoming ordinary
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
By Agnes T. Crane
NEW YORK, Feb 12 (Reuters Breakingviews) - The Federal Reserve's extraordinary policy is at risk of becoming dangerously ordinary. If the United States follows its historic pattern, the period of ultra-stimulative policy could last far longer than markets expect. That's sure to seriously irritate savers - and trouble the world.
The hope is that the U.S. central bank’s zero interest rate policy, known in the jargon as Zirp, combined with a massive balance sheet expansion will eventually stimulate enough spending and investing to bring the unemployment rate down to an acceptable level. Results aren’t expected overnight, though. The interest-rate futures market predicts the Fed won't raise rates until 2015.
What will the economy be doing by then? Well, according to the National Bureau of Economic Research, since the end of World War Two recessions have occurred every five years. It's already been four since the last one. With the current recovery so slow, the gap this time may be longer than average. But it’s at least possible that distortions from extreme monetary policy and record fiscal deficits will trigger another contraction.
If a recession strikes before the Fed has pushed rates up by much, the central bank will have to be aggressive for longer. Zirp could become a way of life.
That is rough on people trying to live off the income from investments. Pension funds and other net savers have lived with negative real yields for years. This could be as good as it gets. That realization would lead to a desperate search for returns. The Fed’s zero is a cue for financial markets’ excess.
What’s more, perma-loose policy does very little to rebalance a global economy – a purported goal of the world's major economies since 2009. Two years later, the U.S. savings rate as percentage of GDP was still just 12 percent versus China's 53 percent, according to the World Bank.
The Fed may have no choice to do whatever it can to revive the planet's largest economy, but the cost could be high.
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- Federal Reserve Vice Chairman Janet Yellen said on Feb. 11 that the U.S. central bank may not raise rates even if one of its two policy thresholds are breached. "A 6.5 percent unemployment rate and inflation one to two years ahead that is 1/2 percentage point above the Committee's 2 percent objective are thresholds for possible action, not triggers."
- Yellen speech: link.reuters.com/puq85t
- The annual U.S. inflation rate, as measured by the personal consumption expenditures price index, fell to 1.4 percent in December from 1.5 percent in the prior month.
- PCE price index: link.reuters.com/ker75t
- The U.S. unemployment rate rose modestly in January to 7.9 percent, according to the U.S. Labor Department.
- U.S. jobs data: link.reuters.com/fyc97h
- NBER data: link.reuters.com/qyq75t
Into thin air [ID:nLN0B176Q]
Angel in the details [ID:nL1N0AZ6R8]
Boolean policy [ID:nL1E8NCCO8]
- For previous columns by the author, Reuters customers can click on [CRANE/]
(Editing by Edward Hadas and Martin Langfield)
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