Fed Announces it Will Keep Interest Rates Low Until Unemployment Isn’t Quite So High

Ben BernankeI know this is a temporary reprieve. But I really have to thank John Tamny from pulling me back from the abyss. There is nothing quite like blinding anger to help one out of a depression. I’m not expecting much; by tomorrow, I expect to be back down. But while I’m feeling relatively good, I wanted to take a moment to discuss something I saw today in the New York Times that I thought was hilarious.

The article is, Fed to Start Unwinding Its Stimulus Next Month by Binyamin Appelbaum. Now, the humor didn’t come from the author or the Times. It came straight from the Federal Reserve itself. As everyone outside Washington and Wall Street knows, the economy sucks and it is getting better at a glacial speed. So the fact that the Fed has decided that now is the time to start tightening—Taking the punch bowl away before the party gets out of hand!—is funny enough.

Are these guys and gals really that out of it? In a word: yes. But the high comedy is yet to come. The Times reports:

The Fed sought to offset concerns that it is once again pulling back too soon by reinforcing its intent to hold short-term interest rates near zero “well past the time that the unemployment rate declines below 6.5 percent, especially if projected inflation continues to run below the committee’s 2 percent longer-run goal.”

Remember: I was really depressed. Yet when I read that I howled with laughter! But you can be forgiven if you don’t see the hilarity. So let me explain. Before the 1990s, full employment was thought to be 5%. Since then, we have found that it is actually 4%. This is the unemployment rate that we can have without cause inflation. So the Fed saying that they will keep interest rates low “well past the time” unemployment reaches the still very high 6.5% mark is just ridiculous. And then they add that they will “especially” do this if the inflation rate continues to be below 2%. First, 2% should not be the inflation target; 4% should be. But the hilarity only builds, because it isn’t enough to hold interest rates down as long as inflation is at the long-run goal of 2%; it has to be below that rate.

In the end, what they are saying is that even though unemployment is ridiculously high, they are going to stop doing one of the things that can help that situation (bond-buying campaign). But we aren’t to worry, because they won’t stop doing the other thing (keeping interest rates down). Except that they will only continue to do that second thing as long as unemployment is super high and inflation is below target. John Edwards was right: there are two Americas. There are the clowns and everyone else. And the clowns are in charge.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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