"Economic Outlook, the Banking Sector and Developing Disequilibrium"
In the latest Region Focus, published by the Federal Reserve Bank of Richmond, Renee Haltom provides an introduction to our topic today when she states that “When the Fed injects money into the economy, the effects are not spread evenly.” Indeed, monetary policy does impact households and businesses, big and small, differently, reflecting their debt/creditor position and their sensitivity to inflation and labor market developments. Uneven fluctuations among the various components of the economy are the norm for the U.S. economy.
One surprising development for many households has been that even low, moderate inflation will negatively impact savers in a world of even lower interest rates. This is an era of financial repression.
Moreover, a policy that holds interest rates below the market-clearing equilibrium rate for an extended period provides little incentive for lenders to extend credit.
What are the financial motivating factors behind the current economic recovery given the easy monetary policy at the Federal Reserve? What can the current economic data tell us about the state of financial repair since the Great Recession? Recent economic data appear contradictory to financial developments.
In the latest GDP release we witnessed negative economic growth reported for the fourth quarter of 2012 and yet the equity market indices of the Dow Jones and S&P 500 are near previous high-water marks.
Recently, President Esther George of the Kansas City Fed indicated that “the low-interest-rate-policy may be creating incentives that lead to future financial imbalances.” Our view is that we have moved beyond may be to the reality that the Fed is actually already creating incentives in the market that are generating financial imbalances.
Our framework for the outlook always follows the five pillars of economic factors that drive good decision making: growth, inflation, interest rates, corporate profits and the dollar.
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