Tags: Reich | Fed | rates | unemployment

Robert Reich: Pegging Interest Rates to Unemployment Rate Won’t Work

Friday, 14 Dec 2012 08:13 AM

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The Federal Reserve’s decision to keep interest rates at rock-bottom levels until unemployment rates fall by more than a percentage point won’t boost the economy, said Robert Reich, former Labor Secretary under Bill Clinton.

The Federal Open Market Committee announced after its December meeting that it will keep its benchmark lending rate, the fed funds target, at 0 to 0.25 percent as long as unemployment rates hover above 6.5 percent, well below the current level of around 7.7 percent.

Interest rates will also stay near zero provided inflation rates don’t threaten to cross a 2.5 percent threshold.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

Expect rates to stay low indefinitely, because no amount of monetary stimulus measures out there will lower jobless rates until banks loosen their currently tight purse strings, Reich said.

“[T]he sad fact is near-zero interest rates won’t do much for jobs because banks aren’t allowing many people to take advantage of them. If you’ve tried lately to refinance your home or get a home equity loan you know what I mean,” Reich wrote in his blog.

Banks don’t need to lend to homeowners anyway.

“They can get a higher return on the almost-free money they borrow from the Fed by betting on derivatives in the vast casino called the global capital market,” he added.

“Besides, they’ve still got a lot of junk mortgage loans on their books and don’t want to risk adding more.”

Lower interest rates reduce capital costs, which ideally prompt businesses to borrow money and invest and hire.

Many businesses, however, aren’t borrowing because they don’t see any customers lining up for new products and services.

Those customers aren’t out there spending because they don’t have new money, thanks to tight lending standards and lower wages.

“And here we come to the crux of the problem. Consumers don’t have additional money. The median wage keeps dropping, adjusted for inflation. Most of the new jobs in the economy pay less than the jobs they replaced,” Reich pointed out.

“Corporate profits are taking a higher share of the total economy than they have since World War II, but wages are taking the smallest share since then.”

Public spending must keep the middle class afloat, and unions play a role as well, while tax breaks and deregulation alone won’t ensure a prosperous America.

“The real job creators are America’s middle class and all those aspiring to join it, whose purchases propel the economy forward. And whose declining earnings are holding the economy back,” Reich wrote.

“So two cheers for [Fed Chairman] Ben Bernanke and the Fed. They’re doing what they can. The failure is in the rest of the government — at both the federal and state levels — still dominated by deficit hawks, supply-siders and witting and unwitting lackeys of big corporations and the wealthy.”

Market participants, meanwhile, point out that the Fed’s new targets don’t represent any real changes from past policy goals anyway.

“These threshold figures are consistent with the economic forecasts and rate guidance that have been in the Fed’s quarterly economic projections since last year,” said Greg Gibbs, senior FX strategist at RBS, according to CNBC.

Gibbs told the network that the Fed has crafted past policies to bring longer-term unemployment rates to the 5.2 to 6 percent range.

“Some Fed governors have expressed a preparedness to see short-term inflation as high as 3 percent to more closely meet the full employment target,” he said.

Editor's Note: The Truth About the Economy — Government Documents Lead to Eerie Conclusion

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