Regan: Has Fed policy jumped the shark?
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.
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.