Federal Reserve Statement & Economic Analysis
December 17, 2009
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Posted by Michael S. Langston
Yesterday, the Federal Reserve, through the Federal Open Market Committee (FOMC) released an updated statement about their views on the economy, the prior one having been released on November 4th.
You can read the full text @ the Blog Calculated risk (here). Among other things in the statement, the main changes in thinking since November are encapsulated in the opening paragraph:
Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months….
Of course it has! With the FHA pushing home loans like Fannie & Freddie have (here @ DetailedAbstractions) & continuing to pay people to buy houses (8K dollar tax credit extended @ LA Times) and property prices declining as the market corrects prior bad incentives (here @ DetailedAbstractions), the result is obvious . Given non-market, but economic incentives to purchase property, property prices in real terms decrease, therefore demand increases.
What this does not say however is whether this is sustained. Lots of individuals for instance took advantage of the Cash for Clunkers program (here @ DetailedAbstractions) mainly resulted in a short-term boost in car sales, but at the expense of lower future sales.
This of course doesn’t mean the housing market isn’t on the rebound, but I see no evidence that really allows this conclusion at this time.
It continues:
…Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth.
Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
& there’s the rub… The Federal Reserve is supposed to be an independent branch of the government outside of any specific administration, but when publishing statements which disagree with basic economic thought one might start to wonder.
In fairness, it could also be just simple self-interest in that they need to justify spending billions on bailing out bad companies., but to use the words, “policy actions stabilized the market” makes this seem unlikely, but I digress.
The main issue with this portion of the statement is that’s its simply untrue. New policies such as “too big to fail” which the Federal Reserve admitted can’t continue (here @ Business & Media), have seemingly become official government policy (here @ Reason Foundation).
Additionally, there is widespread agreement that the new financial regulations the administration is pursuing will result in higher costs of doing business (here @ The Economist, here @ Cato, here @ Reason Foundation, among others). These new barriers to entry will stifle new business creation, creating less incentive for economic activity. Additionally, just as “too big to fail” was supposed to fix large interconnected companies, but instead ended up cementing that status for certain corporations, the new regulations are highly unlikely to prevent a recession for similar reasons from happening again (here @ DetailedAbstractions).
All in all, it seems the Federal Reserve has taken a very short-sighted approach and produced a political paper, not an economic one.
Categories: Business, Economics
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Tags: Business, Economics, Federal Reserve, Financial Reform
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