Welcome back, my friends, to the show that never ends. Remember how the Federal Reserve planned to use non-existent interest rates and “quantative easing” — the polite way of saying printing money — as a temporary means to boost confidence in the economy? Sometimes a plan succeeds too well. The Washington Post reports that the Fed now has no idea how to return to a more normal posture on money supply, and may be stuck on the same path for a very long time:
Two years ago, top officials at the Federal Reserve mapped out a strategy for withdrawing the central bank’s unprecedented support for the American economy.
The official communiqué was titled “Policy Normalization Principles and Plans,” and it was supposed to serve as a rough outline for the tenure of newly installed Fed Chair Janet L. Yellen. Essentially, it consisted of two basic parts: Raise interest rates and shrink the central bank’s massive balance sheet.
But now, both of those steps are being called into question as Fed officials grapple with an economy that appears to be stuck in first gear. Instead of executing its exit strategy, the Fed is confronting the possibility that the dramatic measures it took to safeguard the recovery will remain in place indefinitely.
Surprise! This trap has been obvious for a very long time. The Fed has tried to back out of its zero-interest position for a long time, but stalls out for one incontrovertible reason: the economy remains in poor shape. Investor confidence prices in the Fed’s current policy for that reason. If the cheap-money spigot gets turned off or even restricted in any significance, investors know that there are few reasons to remain bullish.
If this seems counter-intuitive, it’s because the Obama administration likes to talk about how they’ve rescued the American economy and how we now are on a path to real growth. The media likes to repeat that ad nauseam. However, Barack Obama will be the first post-WWII president to have failed to achieve 3% annual GDP growth in any year, even with an entire presidency of free money to banks and lenders. Even Jimmy Carter managed to get three years of GDP growth greater than 3%, even if he presided over massive inflation and interest rate hikes that sapped that growth to the bone.
The Fed’s QE and zero-interest strategies might have worked had the Obama administration taken advantage of the opening by a rapid reduction of regulation and tax policies that benefited investors. Instead, the White House doubled down on regulatory adventurism from ObamaCare to the EPA, and pushed Dodd-Frank rather than look for ways to break up the “too big to fail” financial institutions that have made American financial markets so brittle. Without those policies to assure investors of a safe market, the Fed strategies are all that’s making investment attractive. Any attempt to pull the plug on them will have the immediate and obvious reaction of recession, which would necessitate resurrecting those Fed strategies all over again.
The QE∞ is a ship with no port of call. It’s akin to the container ships from the defunct Hanjin line, sailing aimlessly with nowhere to end their journey. Until we have a new approach to regulation and tax policy, they’ll keep steaming with no place to go.