Fed Continues Free Money Party Ignoring Impending Hangover

Last week’s Courier Herald column:

I’ll add a TL;DR up front, and a note that I’ve been skipping a few columns here that aren’t #gapol focused – like this one. But I feel this needs to be said more plainly: We still have policymakers in Washington stuck on solving the last problem – that of worrying demand would fall during economic uncertainty surrounding the pandemic. We don’t have a demand problem. Period. We have supply problems across the board, including in the labor market. When we continue to create more money chasing too few goods/services, it doesn’t end well.

This week the Federal Reserve left interest rates unchanged, remaining at historic lows.  Their key benchmark rate for short term institutional borrowing is between nothing and one quarter of one percent.

In addition, the Federal Reserve continues to purchase approximately $120 Billion in mortgage backed securities every month, as it has been doing for over a year.  These securities represent loans of up to 30 years, and the Fed is essentially acting in place of investors who traditionally purchase these to generate stable yield from interest rates.  The effect is to keep interest rates for long term debts artificially low.

The slash of short term rates to zero and the mortgage purchases to usurp upward pressure on long term rates began in direct response to the unknowns as the world’s largest economies simultaneously shut down in order to stop the spread of coronavirus.  Eighteen months later there is much less uncertainty with respect to economic forces at work.  And yet, like all well-intentioned actions on behalf of the government, it’s hard to let the market resume what markets are supposed to do when it’s easier to benefit from crisis mode.

There is a gamble going on here, and it may pay off.  The Fed is currently betting that long term deflationary forces that have been at work for decades – namely technological improvements that have increased efficiencies and lowered consumer prices – will eventually counteract the short term forces of printing money.  A lot of money.

And yet, consumers are already showing signs that they are growing weary of all of this “help”, even if they’re not sure why.  Those of us that own homes like low mortgage rates.  Renters, meanwhile, are seeing rents increase at the same time they are facing more stringent qualification standards from landlords.

Consumers are flush with cash.  Various stimulus programs from increased unemployment benefits, direct payments to taxpayers, PPP and other loan programs, and bonus payments to many government employees have all added to increased buying power for a sizable portion of the American population.

These programs were all designed to keep demand high during the economic uncertainty that came with the shutdown.  Timing, in economics, is everything.  When many of these payments were made, many stores weren’t open, travel was limited, and/or consumers weren’t comfortable yet spending their money.

We now have consumers trying to buy goods and services in almost all categories that simply don’t exist.  The entire supply chain is under stress, with many parts of it currently broken.

Factories in China and Vietnam, among others, have shut down again due to the spread of other Covid variants.  It should be noted that the vaccines developed in China and Russia have proven far less effective than those developed in America and Europe.

The goods and raw materials that have been produced in Asia have been tied up in shipping.  Ships and shipping containers are in short supply, and the wait to get a ship docked and unloaded at major west-coast ports is now measured in weeks.  It should also be noted that Georgia’s ports are again offering an efficient solution for many of these customers.

Once goods are here, the supply of trucks and drivers has turned domestic delivery into a frustrating guessing game for many.  Ask anyone that has tried to purchase furniture in the last three months.  “In stock” furniture can take up to 6 weeks to get delivered from a warehouse in the same state.  A Ouija Board is used to determine delivery dates for items that must be ordered.

Meanwhile, many states are still participating in the program providing enhanced unemployment benefits, despite worker shortages across all industries, at all skill levels.  A program that was designed to ensure those who couldn’t work during economic shut down has morphed into our President whispering “pay them more” to employers if they want their employees back – noting the government is now competing directly with struggling small businesses for labor.

The cost of all of this is higher prices for fewer goods and services, with longer waits for everything from new cars to oil changes.  The value of the pay raises is being eaten away by the dramatically rising cost of staples and energy. 

Free money all fun and games until it isn’t.  The Federal Reserve’s role is to take away the punch bowl as the party is just becoming fun.  When they don’t, the hangover is always more painful than it should have been.