Fed Policies are Hurting the Economy

May 23, 2014

After several years of rock-bottom interest rates and trillions of dollars of quantitative easing, the U.S. economy is growing at just 2 percent, writes Diana Furchtgott-Roth, director of Economics21 at the Manhattan Institute.

No country has become successful by printing money and weakening its currency, and under the leadership of Ben Bernanke and Janet Yellen, the U.S. dollar has fallen by 15 percent against the euro. Interest rates have sat close to zero during this time, and consistently low interest rates can lead to inflation, further slowing economic growth. 

There is evidence that inflation is already taking hold. Inflation often starts with increases in food prices, and over the last year, the price of food has risen 2.7 percent. In April, the cost of living rose at its fastest rate in 10 months.

How does the current economic recovery -- which began in June 2009 -- compare with previous ones?

  • Over the past four years, GDP growth has averaged roughly 2.2 percent. This is nowhere close to the growth we saw in the fourth quarter of 2006, when GDP grew at 3.2 percent.
  • Usually we can expect unemployment rates to decline in the years following the onset of a recovery. However, our current level of unemployment is 6.3 percent, a full percentage point higher than the average rate at this point in the U.S.'s four previous recoveries. Moreover, the only reason that the unemployment rate has fallen to 6.3 percent is because the labor force participation rate has dropped to levels not seen since 1978.
  • Participation rates in the workforce should rise alongside employment rates. Instead, we have seen a drop in the participation rate from 65.7 percent in June 2009 to the current level of 62.8 percent.
  • Additionally, 35 percent of the unemployed have been unemployed for more than six months. That is significantly higher than in previous recoveries. The portion of the unemployed that were unemployed for more than six months was a respective 18 percent and 16 percent in September 2006 and January 1996.
  • The number of Americans enrolled in the food stamp program has grown by 37 percent since the start of the recovery, from 35 million to nearly 46 million -- 15 percent of the U.S. population. In previous recoveries, food stamp usage fell.

In past recoveries, the Federal Reserve increased interest rates. Between February 1994 and February 1995, the Fed increased its rates from 3 percent to 6 percent, strengthening the dollar and speeding up recovery. The Fed needs to end its zero interest rate policy, writes Furchtgott-Roth, because once inflation takes hold, it is difficult to stop.

 

Source:   Diana Furchtgott-Roth, "America can't prosper with low rates, weak dollar," MarketWatch, May 16, 2014. 

 

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