photo courtesy the Federal Reserve
The suspense surrounding this week’s periodic meeting of the Federal Reserve Board of Governors was not about what will happen; it is was about who would be present to see it. Yesterday’s nor’easter in Washington D.C. was expected to force some governors to participate by phone.
The meeting’s outcome, on the other hand, is less of a cliffhanger. At the end of the meeting this afternoon, Fed Chairwoman Janet Yellen will almost certainly announce another quarter-point hike in the Fed’s benchmark rate, bringing it to a target level of 0.75 to 1.00 percent.
This is not an armistice in the war on savers. I wouldn’t even go so far as to call it a cease-fire. But at least what had been a full aerial assault has been reduced to something resembling sniper fire.
Coincidentally, today the Labor Department will announce the consumer price index for February. In January the index jumped 0.6 percent from December (about half of which was attributable to higher energy prices) and was 2.5 percent higher than a year earlier. All of which means that any saver who received less than 2.5 percent interest in the prior year – everyone who kept money in the bank in a one-year certificate of deposit, for example, or in a money market mutual fund – actually lost purchasing power due to the Fed’s ongoing, though slowly relaxing, financial repression.
There is hope for savers, however. With inflation now looking like it might reach and stay near the Fed’s 2 percent annual target, and assuming the central bank raises rates in similar quarter-point increments two or three more times this year, savers may finally have a chance to start breaking even. That chance may arrive a year from now. Or it may not.
Over in Europe, trench warfare against free markets continues, although the combatants are clearly staggering. The European Central Bank continues to hold to negative interest rates; financial institutions must pay 0.40 percent just to park their cash with the ECB, even as regulators demand those same institutions hold ever-increasing amounts of capital in reserve. Sclerotic political systems are frustratingly slow to reform their labor markets. ECB head Mario Draghi is reduced to celebrating economic growth that hovers around 1 percent.
Yet even Draghi and his colleagues are reportedly discussing an upward interest rate move that might precede the end of his bank’s quantitative easing – or at least one that might arrive sometime prior to the apocalypse. As for when the end of quantitative easing will arrive, that is also unclear. The ECB has said it will run until at least the end of 2017, but tapering may extend into next year (or beyond). Draghi recently announced that rates would remain where they are for the present, but his speech was sufficiently ambiguous to leave analysts collectively unsure how to characterize it.
In sharp contrast to the stock market “taper tantrums” that accompanied earlier rounds of Fed tightening (an ironically loose usage of that word), markets have taken the first two rate increases in December 2015 and December 2016 pretty much in stride. I suspect the same will happen this time. Wednesday’s increase will certainly surprise nobody who has been paying attention to the Fed.
Moreover, a relaxation in the interest-rate straitjacket, combined with a hoped-for easing of onerous regulatory burdens in the banking system that came as part of the Dodd-Frank package, may help start capital flowing through the economy’s circulatory system and finally give some oomph to a long-lived but asthmatic recovery.
Who knows? Maybe we will get back to a point when borrowers compensate lenders for the use of their capital, at which point we can finally declare peace is at hand.