It’s widely expected that the Federal Reserve will, after six years of waiting, finally hike interest rates. The so-called zero interest rate policy (ZIRP) that has prevailed for more than half a decade now may finally be drawing to a close.
ZIRP was originally intended as an emergency measure to boost an economy in danger of coming totally unglued during the 2008 financial crisis. As the stock market bounced back in 2009, and the real economy started to come with it in 2010, many economists started calling for rate hikes to get away from a zero interest rate and return economic conditions more toward normal. Fearful that the country could get trapped in a no interest rate environment for years, such as happened to Japan, many analysts wanted to get hikes started as quickly as the economy could possibly stomach it.
The Fed, concerned about, presumably, the possibility of a double dip recession, failed to hike during this window.
The unbelievably drawn-out 2011-12 European panic was enough to keep the Fed on hold through that span. It seemed every time the US economy would pick up a bit of steam, a new wave of panic selling would originate from Greece, Ireland, or some other far-flung European Union outpost and wreck the mood.
In 2013, European problems finally abated, seemingly leaving the Fed a wide open path for the long-awaited rate hike. The stock market was up huge that year, and the main street economy was moderately strong. Still, the Fed demurred.
2014 brought the beginning of the oil and emerging markets crash. Besides, the domestic economy remained sluggish. Despite nothing much changing in 2015, it appears the Fed decided for the sake of their credibility, they had to hike. Even with economic conditions remaining fairly weak in the US, downright nasty overseas, and there being little inflation to speak of, the Fed appears deadset on hiking.
With today’s move, assuming Yellen does in fact follow through, it appears the end of ZIRP is near. Will it be missed?
The answer is mostly a no, although to its credit ZIRP wasn’t entirely without merit. ZIRP certainly allowed the stock market to come roaring back after the financial crisis. It took longer, but credit markets finally have picked back up over the last year or two. The long depressed housing and new automobile markets are, in 2015, finally reaching the sorts of strength they had before the financial crisis.
And to ZIRP’s credit, it failed to unleash the sorts of dramatic consequences many folks had predicted. There’s been no huge wave of inflation, gold hasn’t soared as people had expected, and contrary to nearly everyone’s expectations, the dollar has made a huge surge.
Boosting the stock market and enabling people to take out more car loans doesn’t make ZIRP a success though. By more traditional economic measures, the US economy is still running far under where it should be.
Real wages continue to plod along, with folks in the middle class or below seeing little to no improvement in their earning power over the past decade.
Unemployment has come down, but much of that is a factor of discouraged workers retiring or going on disability rather than actually finding jobs.
In a few spots, the Bay Area, New York, or Seattle, for example, the economy appears to be booming again. But go to the heart of the country, be it the midwestern rust belt, the deep south, or the more rural areas of the northeast, and you’ll see decay and decline at all sides.
If anything, the government and Federal Reserve’s actions from the financial crisis has served to make the gulf between the rich and everyone else even wider.
Rich people saw their stock market bailed out. Poor people lost their homes. Wealthy executives got golden parachutes if they lost their jobs at all. Poor people had their jobs “right-sized” to China or Mexico. The Federal Reserve ensured that big-shot investors got huge gains in the stock market. Penny pinching retirees got peanuts for their savings accounts at banks.
The end of ZIRP is a positive for the economy in the longer run. It will probably create more pain in emerging markets and commodities in the short term, harming the global economic outlook for 2016. In the longer view, it is something that had to happen to start normalizing economic conditions.
However, the whole culture of bailouts and artificially manipulated interest rates speaks to the huge divide that faces modern-day America. The nation is being managed for the benefit of a small portion of society, things like interest rates, which were previously left more to the whims of the free market are now centrally controlled to benefit interested parties.