NCPA - National Center for Policy Analysis

FED Policies Could Nose Dive Economy

May 15, 1997

The Fed's assertion that the March interest rate hike was needed to head off a surge in inflation caused by "excessive credit creation," due to an "overly accommodating monetary policy," is bogus, according to many economists:

  • For the year ending in February, the rise in nonfinancial debt outstanding was the smallest (5.3 percent) since the Fed started collecting data in 1950.
  • The Fed's monetary policy shows classic symptoms of tight -- not accommodating -- policy, with total bank reserves down, the value of dollar high on world financial markets, and the price of gold in the U.S. collapsed.
  • For the past three months, total bank reserves have declined at annual rates of 4.3 percent, 1.8 percent and .04 percent, respectively, analysts note.

Economists observe that the record of the late 1980s and 1990s shows that sustained slowdowns in bank reserves lead to national economic downturns, which was the case just prior to the recession starting in July 1990. Total bank reserves rose just 0.88 percent in the three years preceding the 1990 recession, they note.

Besides tight money, the Fed's restrictive fiscal policy is also dragging the economy down, economists warn:

  • The U.S. Treasury's primary operating budget posted a surplus of $153 billion in March, or 2 percent of gross domestic product, the highest ratio in almost 30 years.
  • Treasury operating surpluses have preceded every recession since World War II, historical data shows.

The Fed's tight money policy is already inhibiting a six-year surge in hiring in the retailing and services industries, where 9.8 of the 12 million net new jobs have been created since the March 1991 recession. Economists forewarn that if job growth stops, so will the economy.

Source: H. Erich Heinemann (Heinemann Economic Research), "Ups and Downs of the Wrecking Crew," Washington Times, May 15, 1997.


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