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Douglas Lenski

Fed Mandate and Low Interest Rates

Monday, January 20, 2014 - Article by: Douglas Lenski - Wholesale Mortgage Services of Wisconsin - Message

Let us take a look at what the mandate is for the Federal Reserve.

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."

The one goal the Federal Reserve is targeting is employment. The have actually used a target rate of 6.5% for unemployment. That is when the Federal Reserve stated it will start to taper bond buying. Then why has the Fed jumped the gun?

You will see in an article I wrote that the participation rate is at its lowest since 1978. The Labor Department reported a 6.7% unemployment rate. In October of 2009, the unemployment rate was 10% according to Bureau of Labor Statistics. You can see the link below. The chart from the link above shows a 65.8% participation rate in February and a current participation rate of 62.8%. That means the 3.3% decrease in unemployment is attributed to the 3% decline in participation. There are only .3% fewer unemployed people then there were in 2009. The other 3% just do not count anymore.

I am surprised that the Federal Reserve and Government officials are so easily manipulated. The fact is that the employment picture is still dire. Stable for the last 4 years but still dire. The Fed mandate is for maximum emploment and we are currently at the lowest participation rate. Why are they tapering?

The other graph from the link above shows how many companies are warning on earnings. Earnings warnings are at a 5 year high. The last time warnings were this high the unemployment rate was at 10%.

Fewer people employed and fewer earnings spells trouble for the economy. We have no idea why the Fed saw fit to reduce the bond buying program. That is why we believe interest rates must remain low for the remainder of the year.

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