The Federal Reserve Bank is winding downits second quantitative easing program by the end of June. By some accounts, the wind down is coming not a minute too soon.
Quantitative easing (QE) refers to the Federal Reserve Bank’s efforts to stimulate economic activity in the United States by keeping interest rates low. During its QE2 program, the Federal Reserve did this by buying securities from the United States Treasury; thus, in essence, printing money. This new money, which boils down to an account entry on the Federal Reserve’s books, is pumped into the economy with the hopes that the increased supply of money will work to drive down rates, and that low rates will encourage consumer and business lending.
Proponents of the Federal Reserve’s first quantitative easing program, which ran from the fall of 2008 to the spring of 2010, credit the combination of QE, near zero interest rates, the bank bailout, and the stimulus bill with helping the United States avoid the severest level of an economic downturn in 2008.
Critics of QE2, such as Professor Walter Williams of George Mason University, are concerned about the threat of inflation. When asked about the impact QE2 has had on the African American community, Professor Williams told Politic365.com, “[t]he FRB needs to stop doing what it has been doing – printing money and risking inflation. Wealthy people can use the market as hedges against inflation, an option less open to less wealthy people.”
When we look at the performance of the stock market over the past two years, we can see Professor Williams’ point. Since the stock market bottomed in the second week of March 2009, the market has enjoyed a consistent rally. For example, after the Dow Jones Index closed at 8168.12 at the end of March 2009, it rallied to close two years later at 12810.54.
Over that same time period, unemployment for African Americans went from 13.5% in March 2009 to 15.5% in March 2011. Not only could more of us not buy stock, but more of us could not even pay rent.
The conventional wisdom from traders and Wall Street analysts has been that given the inexpensive money provided by the Federal Reserve, banks could borrow cheap money and invest either in safe debt instruments or take a little extra risk and buy stock in companies that do substantial business in countries that are part of the world’s emerging markets. These countries would include Brazil, China, and India to name a few. Wealthier individual investors could also follow the same strategy.
These borrowing and direct investing opportunities are not typically available to most Americans, especially African Americans.
Given the Federal Reserve’s dual mandate of keeping inflation in check while helping to maintain a level of full employment, the Federal Reserve’s market intervention strategies appear to only work partially. Inflation has been relatively flat, averaging 1.95% per year between March 2009 and March 2011.
Full employment, which has been historically pegged at an unemployment rate between four and six percent for the overall economy, seems to be something of a distant memory, especially if we apply that definition to the current state of employment for African Americans. The nation has not been at an unemployment rate of six percent since July 2008.
The good news for policymakers is that right now Americans appear to be a bit more upbeat about the prospects of rising inflation. According to consumer sentiment data released on May 13, the Reuters/University of Michigan Sentiment Index rose to 72.4 from 69.8 at the end of April. The consumer price index, the nation’s barometer for inflation, rose 0.4% in April, an increase that is lower than the 0.5% increase recorded in March.
Money and investment move to the activity that provides the highest returns. Commercial behavior would indicate that businesses and investors are looking abroad for higher returns, particularly to countries that have exhibited faster gross domestic product growth rates than the U.S.
If Federal Reserve policy is to have any positive impact on the African American political economy, one suggestion may be for the Federal Reserve to abandon any consideration of a QE3 and start taking cash out of the system. By allowing rates to increase slowly, investors and businesses may start taking a second look at the U.S. as a growth opportunity and as a consequence consider hiring more people in the process.