NCPA - National Center for Policy Analysis

The Fed's Support of Asset Prices and Low Rates leads to Slow Economic Growth

April 2, 2015

The Federal Reserve Accountability and Transparency Act of 2014, introduced during the 113th Congress to rein in the Fed, and to consider alternative rules to guide monetary policy such as the Taylor rule, is expected to be reintroduced in the 114th Congress.

Under the Taylor rule, the Fed would keep its longer-run interest target rate at about 4 percent, which is considered "normal." In contrast, under current policy the Fed's target of 0 to 0.25 percent is likely to persist until September or even early 2016. The pace of any rate increases thereafter will also be slow; the benchmark rate is now expected to be only 2 percent by the end of 2016.

Wall Street expects the Fed to support asset prices, and the Fed has complied; Washington expects low rates to persist, and the Fed has complied, says Cato Institute vice president for monetary studies James Dorn.

According to Dorn:

  • U.S. GDP growth is still sluggish, registering only 2.3 percent last year and expected to reach a mere 2.5 percent this year.
  • The Fed has gained substantial power since the 2008 financial crisis and used that power to politicize the allocation of credit. It has suppressed interest rates for more than six years and used quantitative easing to expand its balance sheet to more than $4.5 trillion.

Unsound monetary policy has crowded out market-liberal reforms that could have treated the causes of slow growth rather than the symptoms. Low U.S. productivity growth cannot be cured with financial morphine. Supply-side remedies like lower marginal tax rates on labor and capital, removing onerous regulations, and institutional reforms that limit the size and scope of government would do more to revitalize private markets than the Fed's failed monetary experiments.

Source: James S. Dorn, "Rates on Hold as Fed Bows to Wall Street and Washington," Cato Institute, March 31, 2015. 

 

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