FOMC Statement – May 3, 2017

The FOMC released its latest statement on monetary policy.  As expected, the Fed will not raise its target federal funds rate.

The elephant in the room is that growth in the U.S., at least as measured by GDP, has been abysmal.  The 2017 Q1 GDP growth came in at just 0.7%.

On this, the FOMC statement stated: “The Committee views the slowing in growth during the first quarter as likely to be transitory and continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2 percent over the medium term.  Near-term risks to the economic outlook appear roughly balanced.”

Of course, you never read a statement that says, “we expect recessionary conditions within the next 12 months”, or something to that effect.

The biggest reason (one of many, admittedly) that got Donald Trump elected president will likely be the biggest reason that he doesn’t get re-elected in 2020.  The economy has been weak, and it is not showing any signs of improving.

Middle class America is hurting with bills and debt.  While unemployment rates have improved from 8 years ago, wages have been mostly stagnant.  Any increase in real wages has been more than eaten up by the skyrocketing health insurance premiums.

The Fed is content right now because the economy is puttering along and the Fed isn’t getting blamed too much.  Sure, libertarians blame the Fed, but that is nothing new, except for the size of the group.

The average American isn’t thinking about the damage done by the Federal Reserve when they are looking at their bank statement and wondering how they are going to pay their next credit card bill.  They may indirectly blame some politicians, but they don’t fully understand why.

The federal government is sucking up about $4 trillion out of the economy each year.  In addition, we are regulated to such a large degree that it literally costs us thousands of dollars (probably tens of thousands of dollars) each year in terms of our purchasing power.  The Federal Reserve enables the massive government spending and the continued deficits.  Without the Fed or a monopoly over the money, the federal government would be far more limited in its ability to spend.

Since consumer price inflation is relatively low, the Fed can sit back and say that it is doing its job.  It is meeting its mandate of maximum employment and 2 percent inflation.

This is very comparable to the disaster that was seen in 1929.  At that time, price inflation was also relatively low.  It was assumed that since consumer prices were tame that there was not bubble activity. It was assumed that the boom was not an artificial boom that could go bust.

If Trump had gotten into office and repealed Obamacare and drastically cut federal spending, along with some of the more burdensome regulations, then he might have some hope.  It probably would have led to some short-term pain, but at least he would have had some hope that the economy would be starting to prosper in 2020.

Instead, we have the continued red tape and the continued spending.  We also have Janet Yellen and company keeping its “accommodative” policy.  Actually, the Fed has not been expanding its balance sheet since October 2014, but keeping its target rate low helps to buy some time and put off the recession a little longer.

Trump would have been better off if Yellen and company had hiked its target rate and brought on the recession quicker.  If the inevitable is delayed and we get a recession in a year or two from now, I don’t think Trump is going to recover from it.  He has already been stupidly bragging about the economy and booming stock market.  If he is going to take credit for that now, he will surely have to take the blame when things go south.

The FOMC’s next meeting is June 13th and 14th.  This meeting is associated with a press conference by Yellen, making it more likely that the Fed could take some action.  My guess is that the Fed will not hike its target rate in June.

If Janet Yellen wants to keep her job, then she will probably do for Trump what seems like a favor in not hiking rates, or at least not quickly.  If I were Yellen, I wouldn’t want to stick around though.  What Bernanke went through in 2008, the Fed chair in the next term (starting in early 2018) may be facing something similar.

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