5 things the Fed’s easy-money policies accomplished
One-quarter of a percentage point isn’t much — but size may not matter.
That's probably how much the Federal Reserve will raise short-term interest rates if it moves this week, as some economists think it will. Once the Fed raises rates, it will mark the end of a historic super-easy-money era. And the Fed’s monetary stimulus has been in place so long that even modest tightening could rattle financial markets.
The current easy-money cycle began in 2007, when the Fed lowered rates for the first time since 2003 — from 5.25% to 4.75%. As the Great Recession intensified, an aggressive Fed cut rates all the way to 0 by the end of 2008. It also began a huge bond-purchase program known as quantitative easing, which pushed down rates on mortgages and other long-term loans as the Fed's balance sheet expanded to over $4.5 trillion.
What did it all accomplish? Experts are split on whether the Fed went too far and may have triggered unintended consequences yet to materialize. But it seems safe to say the Fed’s extraordinary policies during the last eight years led to these 5 things:
A stock-market boom. By pushing rates as low as they can go, the Fed forced investors seeking some return on their money to reconsider stocks at a time when most people were fleeing risky assets. That helped end a stock-market crash that started in 2008. From the low point in March, 2009, the S&P 500 stock index has soared by 193%, or about 30% per year—a long and highly rewarding rally, for those in the market--as this chart shows:
“People felt the Fed was all in,” says Mike Thompson, chairman of Standard & Poor’s Investment Advisory Services. “That buoyed the equity market and created a wealth effect,” as investors watching their portfolios gain value became more confident and more willing to spend. It didn’t do a lot, however, for the 45% of Americans who don’t own stocks, many of them still waiting for the economic recovery to trickle down to then.
A surge in corporate profits. Low rates allowed companies to refinance debt and take advantage of cheap borrowing costs in other ways, which boosted the bottom line when companies needed it. Here’s the chart:
The Fed isn’t charged with safeguarding corporate profits, per se. But it is the Fed's job to maximize employment, and helping companies prosper is an indirect way of doing that. Still, employment hasn’t bounced back as fast as profits, which suggests the Fed’s stimulus helped companies and investors more than the ordinary Americans.
A strong rebound in the auto industry. The White House saved General Motors and Chrysler through the 2009 auto bailouts, but it's the Fed that has played an instrumental role in boosting car sales through low rates and support for consumer credit. U.S. car sales this year are on a pace to top 17 million, which would be close to a new record. The numbers:
Part of the reason sales are booming again is lenders are willing to give loans to subprime borrowers, which — despite the stigma — is a sign of a healthy financial sector (provided the riskier loans come with higher rates). The average price of a new car—nearly $34,000—is the highest ever, as well. That’s largely because low rates allow consumers to get more car for the money. The Fed hasn’t intervened directly in the auto industry, but monetary stimulus in general has given auto lenders the confidence to take reasonable risks and return to normal lending practices.
A modest housing recovery. The housing bust that began in 2006 was the worst since the Great Depression in the 1930s. Housing has taken longer to recover than the auto industry, since the damage was much deeper and it’s riskier to finance a home purchase than a car, which can be fairly easily repossessed. But housing is finally on the mend, thanks in large part to super-low mortgage rates and other Fed programs.
Home values have recovered, sales of both new and existing homes have been steadily improving, and home-builder confidence is nearly back to prerecession levels. It’s impossible to know how much worse the housing bust would have been without the Fed’s help, but it’s plausible that home prices could still be falling, and the bust getting worse instead of receding.
Doubts about the Fed’s power over the economy. It’s clear the Fed can have a powerful impact on financial markets when it wants to, which explains the old adage, “don’t fight the Fed.” But the Fed’s tools are limited to interest-rate maneuvers, which don’t always work the desired magic in the real economy. “Monetary policy helps create a more stable environment for growth, but it cannot drive growth alone,“ says Sara Johnson, senior research director for forecasting firm IHS Global Insight. “The message is somewhat humbling: There’s only so much the Federal Reserve can do.”
Among the problems the Fed hasn’t been able to solve: Labor productivity has barely improved, wages have been stagnant and more Americans seem to be falling out of the middle class than climbing into it from below. Somebody else will have to fix those problems — assuming they can be fixed.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.