A never-ending feedback loop of low interest rates? Really?

In the real world, interest rates lag the real economy. As the economy grows, and the demand for credit rises, interest rates follow and move higher. As the economy fades, and the demand for credit falls, interest rates follow and move lower. It seems the Fed has it backwards believing that low rates lead the economy. Because of that, it seems its policies are working diametrically against its intended goals.

Ben Bernanke and Co. made an interesting announcement today. They said they would tie interest rates to and employment target. Rates would remain low, said Mr. Bernanke until the US unemployment rate dipped below 6.5%. That was the headline. But there seems a get out of low rate card available for the Fed, it's called inflation. Unemployment below 6.5% or a 2.5% forward inflation rate expectation...a betting man should expect the Fed hits the inflation target before it comes anywhere close to 6.5% unemployment, that's assuming 500,000 people don't continue to drop out of the work force every month for the next two years.  

A simple premise is this: Job growth is synonymous with economic growth. Economic growth, measured by GDP, in America is driven primarily by consumption. Fed policies are hurting consumption because higher inflation coupled with stagnant real wages is lowering real income. (If you subtract the higher cost of real goods such as, bread, gas, rent, milk, eggs, tuna, beer, etc. for the average consumer whose income does not match these rising costs, real income is lower.).

That is exactly what we have witnessed during these heady QE times...

Currency Currents 12 December 2012

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