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Wednesday, Apr 25, 2018
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Nearing uneasy end of Fed’s easy street

Hoping to give the slow-moving economy the equivalent of a high-caffeine energy drink, the Federal Reserve has been aggressively buying up mortgages and bonds in a program it calls quantitative easing.

Now speculation that the central bank soon will taper off its $85-billion-a-month purchases is rattling the stock market, which has been the most visible beneficiary of the Fed’s fiscal experiment.

The unprecedented attempt to artificially speed up the nation’s economic metabolism has been no substitute for tax reform, entitlement reform, transportation improvements and other hard choices ducked by Congress and the president.

If success came from monetary policy alone, every third-world country with a press to print money would be wealthy.

The reality is that with interest rates near zero, cautious investors have been enticed into risky, high-yield stocks. There has been an illusion of success as share prices rose this year.

But there has been no spurt in hiring and no major expansion of productive capacity. Unemployment is down to 7.4 percent, but more than half of the new jobs are part time. The fastest growing occupation in the country is personal care aide, followed by home-health aide. Both pay around $20,000 a year.

The third-fastest growing occupation, paying four times the salary of a health aide, is biomedical engineer. Going after those great jobs, as Hillsborough County Commissioner Mark Sharpe has tirelessly pushed the community to do, is smart and far-sighted.

Nationwide, the Fed’s easy-money policies have not helped the millions of people stuck in part-time jobs, or given hope to the millions more who have given up looking for work.

Nevertheless, parts of the economy have become addicted to the Fed’s stimulus. Taking it away is essential, but it must be withdrawn slowly and predictably.

Yields will have to go significantly higher to find buyers for the mortgages and bonds when they are no longer gobbled up by the government through the Fed. But if rates go higher, it will be harder for the federal government to afford to pay interest on its debt.

So why not just keep stimulating? Inflation, which critics five years ago warned would punish us all, has not appeared in full force. But it could.

President Obama recently said that “right now, if you look at the biggest challenges we have, the challenge is not inflation. The challenge is we’ve still got too many people out of work, too many long-term unemployed, too much slack in the economy.”

That’s right, as far as it goes. Putting so much emphasis on “right now” overlooks the reality that the current stimulus is unsustainable. Emergency solutions cannot go on forever without harmful side effects.

“Easing” is a euphemism for an extraordinary policy Congress should find troubling. After five years of buying, the Fed now owns 20 percent of Treasury bonds and notes. It holds 25 percent of the mortgages. The Fed’s vault is packed full of paper assets whose value is sure to plunge as soon as rates start to rise.

The extreme policy has left the country, like a person overdosed on caffeine, restless and irritable.

Those of us in the real economy — students, workers, businesses, investors and retirees — hunger for less manipulation and a lot more certainty.

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