The Fed has officially tied continual money printing to the unemployment rate on the presumption that the two are things are related. That is, they believe that if you make the money appear inexpensive enough people will borrow it and deploy it productively in the economy.
From the Fed statement on the issue:
“…this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”
Obviously, these people have never run a business.
Is it no wonder that the WSJ on the same day notes that US public companies have taken Two Hundred and Seventy Four Billion Dollars ($274,000,000,000) off the investment table to buy back their own stock, instead of using that cash to reinvest in new products and services? (Note also that US public companies still have One Trillion Seven Hundred Billion Dollars [$1,700,000,000,000] in cash.) In many cases these companies are borrowing long at the Fed’s artificially contrived rates to buy their stock back (which in many cases has a dividend rate higher than the cost of borrowing).
The Fed is applying fake tanning solution as Grant Williams notes, simply prolonging the fantasy.
Why then does the stock market remain positive? Perhaps because the Fed assures us of the continual prospect of more money chasing fewer goods, making companies that can pass on inflation in their future prices more attractive than a 1.78% ten year US bond yield. But note, there is no economic growth being generated.
The Fed’s bond buying has clearly become counter productive but they double down on the same policy. Hello? Anyone home? Unfortunately not.
Regards, Pete Weldon