Steve Forbes explains in the latest issue of Forbes magazine why he worries about the Federal Reserve’s recent reaction to a stronger dollar.
THE FEDERAL RESERVE is reportedly upset about the dollar’s recent strength, fearing this will foil its desire to create a certain amount of inflation and thereby retard economic growth. In the Fed’s mind a more muscular greenback will also hurt exports, which will be another growth dampener. The result, the central bank is muttering, may be the postponement of previously hinted-at increases in interest rates, starting in mid-2015.
The Fed’s new fears are bad news, because acting on them will bring about that which Janet Yellen & Co. is purportedly worrying about: a weaker economy. It never occurs to the central bank that its actions after the 2008–09 panic have been the biggest barrier to a vigorous economic rebound.
Credit is critical for commerce, from financing inventories and purchases to expanding existing businesses and starting new ones. The depth and breadth of U.S. capital markets has been a huge advantage in our ability to nurture new companies and provide the lubrication for business’ everyday needs. The Fed’s unending schemes for “stimulating” the economy–from Operation Twist to all the variations on quantitative easing–have had the unintended consequences of seriously distorting and hindering the functioning of our credit markets and, hence, our economy’s ability to expand.
Interest rates are the cost of credit. Suppressing these prices clogs the arteries of commerce. The federal government has had easy and cheap access to money (deficits without tears), as have most large companies. For other commercial enterprises, however, the situation has been a lot more difficult and uncertain. For example, the size of credit lines is reduced, the conditions under which money is loaned more stringent and personal guarantees far more frequently demanded. …
… The Federal Reserve has sucked up vast amounts of cash to finance its purchases of long-term government bonds and mortgage-backed securities. The private sector has been hurt correspondingly.
