In my last post I expressed my support for the Federal Reserve Accountability and Transparency Act (FRAT). Thursday’s 317-point stock market decline underscores my point.
I don’t think it’s possible for Fed intervention to stabilize the economy. Even if I am wrong, the right intervention could only occur if economists at the Fed could actually determine where the economy is going. Describing yesterday’s economy is not very difficult, but understanding today’s and predicting tomorrow’s is very complicated, if not impossible. Investors and business owners often base their decisions on “economic indicators,” which tell us more about the past than the future. Thursday’s stock market decline illustrates this point. Just one day earlier, investors had a different view on the economy.
While the Fed attempts to predict and influence the future state of the economy, investors, business owners, and everyone else are left to predict the future actions of the Federal Reserve. For example, if the Fed raises interest rates, anyone associated with the housing business will likely suffer, and anyone planning to buy or sell a home will find it more costly. For this reason, many analysts are more concerned with the Fed’s reaction to its perception of the economy than with the actual economy. This adds to uncertainty, giving business owners more reasons to stay on the sidelines and not grow the economy.
Just to be clear, I am not arguing that a stock market decline is imminent. Rather, the volatility of the market tells us how investor sentiment changes daily. My point is that the Fed’s overzealous intervention into the economy adds more uncertainty to the economy than it reduces. If we are going to have a federal reserve bank, its actions should be much more subdued. This is only possible if we actually know what the Fed is doing, which is why legislation like FRAT is sorely needed.
I’m a manager at a food distribution company. We cut back workers in 2009 and have been flat ever since. Policies like Obamacare are bad enough, but Fed uncertainty makes it even worse. We are going to stay lean until we have some predictability.
I thought the unemployment rate was declining???
I can’t believe you are picking on the Fed. The economy has done well in the U.S. in the past century. The Fed might not be perfect but how can you say that it’s not doing a good job managing the economy overall?
30 years ago we picked up any coin we saw on the ground. Now, maybe a quarter gets our attention, perhaps a dime. Rarely a nickel. Penny? Forget about it.