Why must we continue to read, listen, and converse about when the Federal Reserve will increase the Fed funds rate to an infinitesimal one-quarter of one percentage point? Just do it and get it over with.
A review of Federal Reserve's unconventional monetary policies shows that few of the central bank's recent actions have achieved their desired goals. Therefore the central bank has little to lose in moving ahead with such a minor rate increase.
The Fed put the U.S. through three rounds of quantitative easing. Through all of them, the economy limped along at an average gross domestic product growth rate of about 2.3%--the slowest economic recovery since World War II. After each round, observers worried that ending QE would be bad for the economy.
What happened? Very little. The economy is still growing at about the same sluggish pace. Long-term interest rates haven't changed that much.
Meanwhile, the Fed has held off shrinking its balance sheet. This is a mistake. The central bank should allow its current $4.5 trillion securities holdings to decrease as principal payments and maturities occur. I believe the resulting small decrease in the portfolio will be easily absorbed by the market, as happened when QE ended. This move would be a good test for further decreases in the future. Given the enormous size of the portfolio, the sooner we start, the better.
In addition, many policymakers, including Fed chair Janet Yellen, have expressed concerns about income inequality. I believe the Federal Reserve's unconventional monetary policy has done more to increase income inequality than just about any other tax or fiscal policy, ever.
The wealthiest Americans are now enjoying record stock market increases. Meanwhile, the ordinary Americans who purchase most of our country's goods and services are earning 10 basis points on their hard-earned savingsthe lowest rate in modern times. How does this stimulate economic growth and employment?
The Federal Reserve's recent emphasis on transparency is also a negative development. The central bank is very proud of its decision to be more transparent about its timeline for raising rates. They think these disclosures will build business confidence.
But there's a downside to this transparency. First, no one can predict the future. There are too many variables that impact the economy and no one is capable of accurately forecasting all of them. For example, the Fed originally said that it would keep interest rates low until the unemployment rate fell to 6%. It fell long ago, but the Fed has still held off increasing rates.
Second, the economy has historically gained a significant boost as "animal spirits" worked their way throughout the system. In past recessions, as the economy stabilized and began to improve, some business decision-makers concluded that interest rate increases were just around the corner and borrowed money at historically low rates. They used these loans to make that acquisition they had always coveted, build a new plant that would be needed as the economy improved, buy or lease new office space and invest in new equipment and technology. This borrowing helped the economy and increased confidence in the recoveries, causing additional businesspeople to conclude that interest rates would rise. Then they, too, invested accordingly. In short, because the "animal spirits" didn't want to miss an unusually great opportunity, the economic recovery became a self-fulfilling prophecy.
Because of the Fed's brand-new interest rate forecasts and more detailed language about when it plans to raise rates, business leaders have had no incentive to be proactive and anticipate the future. Consequently, the economy has not received much of an "animal spirits" economic boost.
The Fed's almost singular obsession with achieving 2% inflation is equally misguided. Low inflation has been beneficial over the past seven years, since wage growth has also been slow. In my opinion, the Fed should simply watch the savings rate in order to determine whether there is a serious risk of deflation. If the savings rate dramatically increases above historical norms, that would indicate that consumers are waiting for lower prices and delaying purchases. This would indeed be a dangerous sign. But I have seen no indication of this danger. In fact, reasonably good consumer spending has been driving our economic growth.
It is a testament to how ineffective and ill-advised the Federal Reserve's policies have been that after seven years of unconventional monetary activism and nine years without an increase in the Fed funds rate, the central bank still believes the U.S. economy is still so fragile that it cannot withstand the mildest of rate increases. What else need be said about the efficacy of the Federal Reserve's monetary policy?
Richard M. Kovacevich is the retired chairman and CEO of Wells Fargo.