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The US Federal Reserve: Let’s Have a Party
Clearly the US Federal Reserve is throwing a party…with the guest of honor being job creation. The Fed is spending billions of dollars to decorate and cater the affair. Unfortunately, it is possible that the guest of honor may not attend.
The Federal Reserve obviously believed that it needed to increase liquidity in the economy due primarily to the poor job market in the US. This obligation to maximize employment in the US is the second of the Fed’s “dual mandates”, and the more controversial one for sure. The primary mandate of the Fed is to maintain a stable monetary system and price stability…aka, keeping inflation manageable. The trouble develops when the Fed’s pursuit of one mandate conflicts with the pursuit of the other. Such may be the case today.
By seeking to spur the stock market in hopes of indirectly effecting job creation in the private sector, the Fed is, arguably for the first-time ever, pursuing a stimulative course solely for second mandate reasons. Even the previous quantitative easing actions undertaken by the Fed over the past few years could be seen as having some primary mandate justification. However, that is not so this time around.
The Fed’s problem is that liquidity in the system doesn’t directly cause job creation. The Fed is counting on the action to spur an increase in asset prices—corporate stocks in particular. Then in response to their new found capital, companies are expected to hire additional workers. Unfortunately, companies have many other factors to consider when making hiring decisions including: demand for their products, geo-political risks, tax and regulatory policy and many others. It is simply naïve to believe that higher stock prices will simply “cause” additional job creation.
With all that is going on in the world in Europe, China, the Middle-East and with the US elections and fiscal cliff, it is no wonder that private sector employers may be extremely cautious with hiring decisions. Perhaps the Fed’s actions will have some marginal positive impact on jobs, yet the potential risk it creates for inflation seems too big to justify this move.
The Fed is throwing a party for sure, but not only may the guest of honor not show…we may get stuck with the bill!
Mortgage rates will likely still benefit from the Fed’s action and I expect rates to remain near all-time lows during the week.
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2012-09-17 16:41:27
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