Federal Reserve is playing a dangerous game

    The Fed is now engaged in a psychological game with financial markets. Stock markets want rate cuts because it helps stocks. Cuts also are good for bond prices. So Wall Street gets a boost, as lower rates make big banks, bad investments look better. But on Main Street:

    Lower Fed rates will not get builders to build more houses in a glutted market, because small builders build most of the new houses.

    Big banks may be benefiting, but the thousands of small banks serving Main Street are not helped; they have more variable-priced loans than variable-priced deposits. Speaking personally as the chairman of a small bank ($100 million in assets), the Fed moves have whacked our profitability.

    Every dollar a debtor might save comes out of the pockets of savers. There is no net gain in spending power for the economy, just a tax on savers to help debtors. The much-discussed government intervention in mortgage markets is more of the same. Some re-pricing might be eased, but not a lot.

    The Fed’s pronouncements have demonstrably impacted small-business owner optimism, starting September, which produced a marked decline in hiring plans and job openings. This has contributed to a weakening of the economy in the short run, not a strengthening.

    Even though some small businesses likely borrow from large banks and may see some tightening, there has been virtually no change in credit-market indicators for small businesses, who produce half the private GDP.

    More cuts will make the Fed look like it’s doing something and make the big financial institutions happy, but will not have much impact on the real economy and may, in fact, do harm if consumers and big business respond the way small-firm owners responded to the Fed’s heightened recession alert.

    I guess we’re now at red on the alert scale.

     

    William Dunkelberg, chief economist of the National Federation of Independent Business (NFIB), the nation’s leading small-business advocacy association, with offices in Washington, D.C. and all 50 state capitals.

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