Regan: Has Fed policy jumped the shark?
(Photo: File)
Judging
by recent headlines — office rents in San Francisco are poised to
surpass Manhattan for the first time since 2000, the S&P 500 is
perched at a record high, the Nasdaq composite is at its highest level
since the millennium, and Steve Ballmer, the former CEO of Microsoft,
just bought the L.A. Clippers for a staggering $2 billion — you'd think
the U.S. economy was on an unstoppable tear.
Think again.
The
U.S. will be lucky to log 3.0% annualized economic growth in the second
half of this year. That's an improvement, yes, but hardly anything to
write home about when you consider that, for the last six years,
economic expansion has been the weakest modern post-recession growth on
record. Meanwhile, the Labor Department's broadest measurement of
unemployment still is in double-digit territory at 12.2%.
So,
while Federal Reserve Chair Janet Yellen reiterated her commitment to
zero interest rates so long as economic data remain weak at the Fed's
big shindig in Jackson Hole, Wyo., last week, it's worth asking whether
Fed policy has jumped the shark. The Fed is still fighting the last
financial crisis and, in doing so, the Fed's policies may be
contributing to a new problem: the creation of an increasingly
two-tiered economy at the expense of the middle class.
Millions
of retirees are struggling to get by on nest eggs that offer little to
no return thanks to low interest rates. And 7.51 million Americans
working part time still are anxious to find full-time work. In addition,
the cost of food, the very thing people actually use and need, is
ticking higher, with grocery store prices expected to jump another 2.5%
to 3.5% this year. Meanwhile, wage growth, as the Fed acknowledges, is
nowhere to be found.
Amid
this economic backdrop, cheap money from the Fed is helping to fuel a
corporate merger boom. More than $2 trillion in deals have been
announced so far this year, a 70% increase over last. And while one
company buying another may increase efficiencies and earnings, many
mergers result in fewer jobs. Mergers are great if you're a banker
getting paid to make the deal happen, or a CEO who can point to
strategic growth and synergies as the result of an acquisition. If
you're a rank-and-file employee? You may well be the synergy — and could
lose your job.
CEOs
are incentivized to make these purchases, in part, because the cost of
borrowing money is so low and the more they show a willingness to buy,
the more valuations increase. As Ballmer acknowledged to me after his
purchase of the L.A. Clippers became official, "There's no doubt that if
you look at the market overall, valuations are high. That's probably to
be expected with interest rates so low." Laughing, Ballmer concluded,
"Maybe some of that's what we see in basketball teams as well."
Maybe it is.
After
all, Ballmer just paid the most ever for a basketball team, with most
analysts convinced he overspent by at least $500 million. But, hey,
what's $500 million when money's this cheap?
It's
not just corporate merger activity driving up asset prices. Low rates
have also incentivized investors to pour money into stocks, helping send
the market to fresh highs. In theory, this is a good thing. Higher
market valuations should make people feel more confident, thereby
encouraging them to spend money. Problem is: Only one group of people
seems to be benefiting — those with assets. The benefits have not
trickled down to the rest of the economy.
So,
while the Fed should be credited for its role in fending off a severe
economic depression, it may now be time for Yellen and company to
reconsider policies which, these days, seem to be contributing to
greater inequality, while doing little to spur needed growth in
employment and wages.
Trish Regan is the anchor of
Street Smart with Trish Regan
daily at 3 p.m, ET on Bloomberg Television. Follow her on Twitter @Trish_Regan.
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