(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
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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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)
Keywords: BREAKINGVIEWS FED/
(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.