The Federal Reserve, the nation's central bank, was established by Congress to regulate the money supply — that is, the value of the dollar, credit and interest rates. And for years now, it has undertaken extraordinary and unprecedented actions to lift the economy out of the Great Recession and to boost recovery.
Recent efforts have included keeping the key short-term interest rate at zero and engaging in "quantitative easing," an aggressive program of buying bonds and mortgage-backed securities and thereby pumping trillions of dollars in liquidity into the financial markets. By digitally increasing the size of its balance sheet on the debit side, the Fed is, in effect, printing money. The balance sheet has swelled to $4.4 trillion, more than four times higher than before the 2008 financial crash.
The Fed remains vague about the timing of an increase in the benchmark interest rate, saying only that it would retain the zero rate for a "considerable time." Several Fed officials have dissented, anxious that continued easy money policies will encourage excessive speculation in financial markets and stoke the next financial crisis — asset bubbles in stocks and real estate.
The Fed is clearly in uncharted waters regarding what it can and ought to do. After nearly six years and the continuation of relentless easy money policies, major weaknesses persist. And, in fact, the economy is now burdened with the unintended consequences of Fed actions — and congressional inaction.
Fed chief Janet Yellen acknowledges that the labor market has not adequately recovered and that wages remain flat and falling. Moreover, she recently noted that a large number of American households are "extraordinarily vulnerable" to financial setbacks. A recent Fed survey revealed a median net worth of only $6,400 last year for the bottom fifth of American families — 25 million households.
The intended purpose of Fed actions was to lower the cost of borrowing for consumers and businesses and to spark economic recovery to the point that it is self-sustaining. However, the recovery has not reached a so-called "escape velocity" at which growth is large enough to stabilize the economy. Last year the GDP grew by 1.85 percent. The Fed itself recently downgraded its assessment of growth this year to around 2.2 percent, down from a March estimate of as high as 3 percent.
So, what has the Fed accomplished so far? Stock prices are at record highs, up nearly 200 percent since the financial crash. The bull market has seen its longest boom in 85 years. The Fed's latest triennial survey reveals that only families at the very top of income distribution saw widespread income gains between 2010 and 2013. The Pew Research Center estimates that, as of 2010, the wealthiest 10 percent of households controlled more than 80 percent of the stocks and mutual funds. Most big banks have recovered; last quarter profits were over $40 billion. Major businesses report record profits. After-tax corporate profits in 2013 tied their highest point on record. Corporate compensation is back to all-time highs.
Meanwhile, worker compensation last year fell to its lowest level since 1948. Nine out of 10 workers fell behind where they were before the financial crisis. In short, more and more of the gains of economic productivity are flowing to those at the top of the income ladder, and the income gap is wider than ever.
For the past three or four years, Congress sat on the sidelines as the Fed took these Herculean actions. Neither the Fed nor the Congress has created enough jobs, and too many of the new jobs are low-wage or part-time. Real wages remain flat or falling. Upward mobility is frozen. More people have left the job market than entered it. Savers are losing money. Small businesses are struggling.
National economic policies for growth, recovery and jobs are Congressional responsibilities. Through fiscal legislation — for example entitlement and tax reform and infrastructure improvements — Congress is charged with assuring financial stability and fostering prosperity. It cannot properly outsource this solemn responsibility to the limited monetary tools of the Fed. The Federal Reserve is not the democratic voice of Americans, though its aggressive actions have moved into functions that are vested in the democratic process.
The middle class and poor in America, for the most part, are not celebrating the extraordinary actions of the Fed. With its forceful venture into unknown territory, the Fed may not have intended the rich to get richer and that the level of inequality rise. But that's what happened — a reverse Robin Hood outcome.
Perry L. Weed, attorney and founder of the Economic Club of Annapolis. His email is email@example.com.
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