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Rates on Hold as Fed Bows to Wall Street and Washington

March 31, 2015 in Economics

By James A. Dorn

James A. Dorn

The biggest story coming out of the latest meeting of the Federal Open Market Committee is that Federal Reserve Chairwoman Janet Yellen does not want to take away the punch bowl, yet. The Fed continues to play to the tune of Wall Street and Washington by stoking asset bubbles, allocating credit, using monetary means to achieve fiscal ends, financing federal debt on the cheap, undermining the incentive to save and ultimately destroying capital.

Yellen is opposed to a congressionally mandated audit of the Fed and to any type of monetary rule. She favors pure discretion and worries that making monetary policy subject to greater congressional oversight would weaken the Fed’s independence and politicize monetary policy.

The truth is the Fed has gained substantial power since the 2008 financial crisis and used that power to politicize the allocation of credit. It has suppressed interest rates for more than six years and used quantitative easing to expand its balance sheet to more than US$ 4.5 trillion. Wall Street expects the Fed to support asset prices, and the Fed has complied; Washington expects low rates to persist, and the Fed has complied.

Capital is being destroyed because when the Federal Reserve has been asked to support asset prices and keep rates low, it has complied.”

In its March 18 statement, the Federal Open Market Committee noted that “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Moreover, in her press conference, Yellen calmed investors by noting that “Just because we removed the word patient from the statement doesn’t mean we are going to be impatient.” The U.S. stock markets cheered, as did government officials who recognize that any rise in interest rates could be catastrophic for public finances, from the federal to the municipal level.

Meanwhile, savers continue to suffer from negative real interest rates. The longer-term consequence is to reduce saving and investment, and thus slow economic growth. Negative rates also have a devastating impact on pension funds. Meanwhile, the federal government continues to secure cheap credit at the expense of more productive private investment.

The politicization of monetary policy has eroded the Fed’s independence. More important, Yellen’s opposition to a rules-based monetary regime, or even to an audit, ignores the fact that Congress has the constitutional authority …read more

Source: OP-EDS

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