Life Is About Incentives, And The Fed Is Offering Up The Wrong Ones

by: Paul Nouri, CFP


Five years into the recovery, investors continue to buy on bad news on hopes of continued Fed policy accommodation.

What ails the american economy has little to do with interest rate levels.

Governments need to do the work of the people to give business owners the confidence to invest in America.

It is now more than five years past the apocalypse of 2008-2009 and the markets and Fed are acting the same now as they have been all along. It's the same bad news for the economy is good news for the markets. Somehow, the Federal Reserve voting members have not realized that this is not a recipe for a strong and healthy economy. Even at 6.7%, unemployment is at the high watermark for most recessions. Much of the constrained strength in housing has come from spec building, rentals, investors and second homes. Inflation adjusted median income is at the same level in 2013 that it was at in 1997. Even the stock market, which has received considerable help from Federal Reserve policies, when adjusted for inflation, is below its all time highs.

The voting members of the Federal Reserve have to convince themselves that if it were not for their brave actions, that the economy would be much worse off than it is today. That the Fed did the right thing by launching Quantitative easing in the depths of the recession can more easily be defended. That they continue to employ such techniques is what boggles the mind. This institution has expanded their balance sheet by over $3 trillion dollars, effectively absorbing the deficit in that time period. The ten-year yield has been under 4% for six years, and the federal government ran unprecedented deficits for years on end.

The point is that what business leaders want and need is certainty. Business leaders are acutely aware that an environment with quantitative easing over the long term is not sustainable. They understand that strength in sectors from housing to autos was driven by the incentives that record low interest rates lends itself to. They also understand that despite the market hitting new nominal highs, much of America is still not confident in the recovery... 5 years in.

So, maybe it is time for the Fed to change its tune. Quantitative easing is not the answer to what ills the American economy. Rational decision makers will take action in a rational environment. Making American products and services competitive by implementing better tax and labor policies can both boost the economy and lower poverty. Local governments and their citizens have to work together to decide how to tackle unavoidable pension sustainability issues. Congress and the administration need to start working together to pass comprehensive immigration reform and an infrastructure planning and funding bill, instead of governing on the election cycle.

The aforementioned are structural issues that are out of the Federal Reserve's hands. The Fed's policies, instead of rewarding those that make measured decisions, have been rewarding speculators betting that the Fed will not pull back on being extraordinarily accommodative. It's time to incentivize America to go back to the work of the real economy instead of incentivizing speculators to inflate the value of investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.