I am here to look after the little guy, or so say many leaders.
Government officials regularly claim they support Everyday Joes — the laborer, the shopkeeper and the homemaker. Unfortunately, government policy two years after the financial crisis favors the big guys.
To help the communities where Everyday Joes live, monetary policy must change. The Federal Reserve is keeping interest rates too low.
The Fed’s Federal Open Market Committee meets about every six weeks to assess economic conditions and choose an appropriate interest rate in the banking system. If the Fed thinks economic activity is too slow — their thinking for more than three years now — it purchases bonds from banks, lowering interest rates. If the Fed thinks economic activity is picking up, it sells bonds to raise interest rates and hopefully, slow inflation.
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After its most recent meeting the committee announced it would continue a program of purchasing long-term U.S. Treasury bonds and will keep short-term interest rates low as well for an “extended period.” The committee cites high unemployment as the reason for continuing a policy of low interest rates.
The committee sees little risk of inflation when the unemployment rate is well above average. Wage increases are unlikely and businesses can’t raise prices much.
These policymakers are missing the consequences for the little guy.
In a low interest rate environment, consumers favor big-ticket items from large corporations, like cars and appliances, over everyday items from small businesses, like clothing and restaurant meals. The Fed’s long-term bond purchases also keep interest rate spreads low. When this interest margin is squeezed, large banks take business from community banks and credit unions.
Low interest rates are doing nothing to create more small business loans. According to the National Federation of Independent Businesses, 92 percent of all small businesses have all the credit they need. Small business concerns lie elsewhere.
Other government policies are raising costs for small businesses. New health care laws raise the costs of employee benefits and new banking laws, like a price ceiling imposed on debit card transactions, hurt the competitive positions of small banks.
Not all world leaders think interest rates should stay low. Juregen Stark of the European Central Bank wrote that global economic conditions are much improved, but interest rate policy is unchanged since the crisis. Inflation-adjusted interest rates are below zero, meaning monetary policy today is actually more accommodative than at the peak of the crisis in 2008.
Increasing market interest rates will have three positive effects on the economy.
First, households with savings accounts, particularly seniors, will receive an income boost and possibly increase consumption. Second, households with high debt levels will have a greater incentive to pay off debts quickly, shortening the time until they return to normal consumption levels. Third, households will experience less commodity inflation, like that occurring from increased global demand for crops and the global political tensions that are raising oil prices.
To stand up for the little guy the Fed must raise interest rates now.