The Fed Statement = Economy Is Still Flatlining

The paramount innovation in the Federal Reserve’s statement yesterday was that it will keep interest rates low until at least the middle of 2013.

The truth of the matter is that our economy is like a patient on the operating table whose heart has stopped and the doctors are scrambling to get it going again. And the Fed’s statement yesterday reveals that the Fed recognizes the patient’s heart is still not beating, and they are employing no new measures to try and get it beating again.

Did anyone really expect the Fed to announce it would raise rates anytime in the near future?

This statement confirms my point in yesterday’s Don’t Fall For the Market Head-fake Today that the Fed is out of bullets. What else can they do to address our economic woes except keep rates low for even longer?

Also of interest is the market’s reaction to the Fed’s statement. How is the fact that the economy is doing so poorly that we will need close to zero interest rates for another two years good news?

Funny, I remember the same pundits who cheered yesterday’s Fed statement saying, earlier this year, that they were bullish on stocks because they expected the Fed’s next move was likely to raise rates sooner than expected in response to the economy doing better than expected.

So, again, how is it good that rates will be kept lower for longer?

The best news out of the statement is that there is at least some dissension. I am not sure on what side of the issues the dissenters stand. However, the dissension gives me hope that there is at least some recognition that keeping interest rates low undermines the long-term economic growth potential of our economy.

The longer we allow capital to flow to lower-return investments, the less capital is available for higher returns investments and:

  1. Our economic growth is slower
  2. There are fewer jobs
  3. There is less demand/consumption
  4. There is less capital to allocate to higher-return opportunities

It is clear that low rates for extended periods of time are not a recipe for the long-term prosperity of our economy.

Low rates are like Keynesian stimulus: they can be effective over short periods of time but can do lasting long-term damage if left in place too long.

If Mr. Bernanke thinks he has no choice, then I suggest he take a look at the riots in the streets in London. He will see that our situation can get much worse.

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