The Fed’s Rain Dance at the Bottom of the Stairs

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Apparently, Charles Plosser, president of the Philadelphia Fed, had failed to check with his handlers when he said on CNBC that the Fed might have to raise short-term interest rates later this year—from practically zero to almost zero, I guess—though just a few days earlier, the Federal Open Markets Committee had announced the extension of its zero-interest-rate policy (ZIRP) through late 2014.

We’ve been getting the same song and dance from the Fed about its “highly accommodative” monetary policy and “exceptionally low” interest rates since 2009. And by now we’ve been programmed to believe that extensions will continue ad infinitum, despite some dissenting voices here and there. In the process, the country has become hooked on low interest rates, and even the idea of raising them, or the mere mention of it, causes bouts of painful withdrawal symptoms.

At first, the expectation was that the “exceptionally low” rates would last 6 months, but now it’s been three years, and three more years have already been added to the schedule, so six years in total, and soon, it’ll be 20 years, à la Japanese, which isn’t exactly the paragon of a healthy economy. While there are cosmetic differences between the two, they do share ZIRP, out-of-control budget deficits, a ballooning national debt, and a political refusal to deal with reality—aided and abetted by a central bank.

It’s an ugly situation. Short-term treasury yields are at practically zero, 5-year yields hit a new all-time low of 0.71%, and even 30-year yields dipped below 3%. Savings accounts, money market funds, and short-term CDs yield just about nothing. Yet inflation was 3% in 2011. The many trillions of dollars that individuals, institutions, and countries hold in these assets are slowly being ground down by inflation, but without compensation in form of yield. Financial repression. And the largest slo-mo ripoff in the history of mankind.

Wages have not kept up with inflation either, not since the wage peak of 2000. Every number hammers home that point…. Oh wait. Not every number. Personal income increased 0.5% in December, according to today’s report by the Bureau of Economic Analysis. This coincided with a flatish December PCE inflation indicator, giving workers the first real wage increase in many months. Last week, the Bureau of Labor Statistics reported a similar phenomenon: a rise in hourly earnings of 0.2% in December and a flat CPI. Real wages increased! A rare event that should be celebrated around the country with a good American brew.

But for the year, real wages were still down 0.9%. For production and non-supervisory workers, the lower echelons of the labor force, real wages for the year were down 1.6%. So, one month hasn’t solved the problem yet. Yet it shows the beneficial effect of taking inflation out of the equation: real wages actually rise. A few months of this, and who knows—consumers might actually buy something with this extra money without having to borrow from the future.

NO, said the Fed, panicking at the mere thought of rising real wages. There shall be no break for workers. Real wages aren’t low enough yet. And so the Fed announced an inflation target: no less than 2% as measured by its low-ball PCE inflation index. So, closer to a CPI of 3.0%. Plenty of inflation to bring down real wages and demolish entire categories of investors, but not so much as to cause a revolt—in the hope that it would stimulate the economy? It’s a rain dance at the bottom of the stairs.

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  3 comments for “The Fed’s Rain Dance at the Bottom of the Stairs

  1. Frank H
    January 31, 2012 at 8:54 pm

    In a "normal" world, we save, which is postponing current consumption for future consumption. This frees up resources that can be invested in capital which leads to meeting that future consumption with more goods and services since a higher capital base makes labor more productive. The interest rate plays a key role. It determines how much people want to save for future consumtion and at the same time determine which capital project soceity should undertake to meet that future consumption. When the central bank intervenes and sets interest rates, it destroys the functioning of the most important pice in an economy. Prices in a capitalist economy help determine where societies resources should be allocated to meet societies needs. When the central bank sets inteerst rates it completely screws up this critical funtion of price. Since entrepreneurs know the central bank is intervening, they can no longer use the price function of interest rates to decide which is the best investments to undertake. So much for monetarist and keynesianism!

  2. February 5, 2012 at 1:12 am

    Frank- Most people arent aware that the federal reserve is a privately owned cartel of bankers. Sort of like if you owned las vegas sands & you could write your own rules, set the interest rates, decide on the m1, and decide when you're going to prop up the dollar, sell dollars, or create additiona-house always winsl. The fed has low interest rates, because all of the banking cartel, is getting basically free money, created out of nothing, fiat after bretton woods 1 & 2, where they print it, do what they please, sent 16 trillion (our gdp is 12 trillion) of our money overseas, while we (the american people) get the invoice and the debt, while we pay it back to the treasury, so that the feds can make more loans when they please. The ultimate end-game, is "bailout", too big to fail. We pay. If you take an hour to listen to this video, you'll have a good intro into this world.
    http://www.youtube.com/watch?v=lu_VqX6J93k

  3. Wolf Richter
    March 14, 2012 at 5:52 am

    Robert – Financial journalists aren't allowed to talk about it. They work for big companies (like GE, for example) that have received money from the Fed. But that's why there are bloggers.

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