Easy Fed policy wins praise as rate stance about to shift

The US Federal Reserve, poised to hike interest rates on Wednesday, got a bad rap for defying financial orthodoxy with its ultra-expansionary response to the 2008 financial crisis.

But now even critics admit the Fed's strategy pulled the world's biggest economy back from the brink.

Since the subprime disaster and the subsequent 2009 recession the Fed has kept key interest rates near zero and injected some $3.5 trillion of new money into the banking system -- a policy known as quantitative easing (QE).

This gave the US economy exactly the boost it needed, according to Dean Baker, founder of the Center for Economic and Policy Research.

"If we hadn't had QE and low interest rate policy it's very plausible that we'd have another two to three million people out of work," he told AFP.

The US unemployment rate, which hit 10 percent in 2009, has dropped by half. Since emerging from recession, the economy has generated a net 13.5 million jobs.
Fed chair Janet Yellen has argued that low rates have benefited low- and middle income Americans, but figures suggest otherwise.

Wages have been static and inequality has worsened, according to economists Emmanuel Saez and Gabriel Zucman.

Most modest American households were no better off in 2012 than they were in 1986, they said in a study.

Housing prices, meanwhile, have embarked on a slow recovery, but are not projected to match their pre-crisis 2007 levels before 2017, according to real estate valuation experts Zillow.

The number of property transactions is still nearly a third lower than before the subprime mortgage disaster.

- And the winner is: Wall Street -

The auto sector has without a doubt been among the main beneficiaries of easy money, according to Chicago Fed chief Charles Evans. Combined with collapsing oil prices, lower rates helped auto sales reach a new annual record at 18 million.

Emerging economies have also gained from low US rates, becoming more attractive to investors looking for higher returns than American banks could offer. Even though now, analysts note, they are feeling the pinch as money flows back out on the prospect of tighter Fed credit.
But the big winner of the Fed's largesse has been Wall Street, with main stock market indices having tripled in value since the financial bloodbath of 2009.

Analysts say that Wall Street has done little more than simply return to a normal stock price growth path -- but that was by no means a foregone conclusion seven years ago.

"Where would we think the market would be if we hadn't had the crisis? It wouldn't be that much different from what we have," Baker mused.

The remarkable US recovery has occurred without any inflationary pressures -- a slap in the face of orthodox financial wisdom, and a phenomenon that economists still find hard to explain.

If anything, stubbornly weak consumer prices are the one missing piece of the economic recovery puzzle -- which is why Yellen and her colleagues may well opt for a very modest rate hike.

Another is the strengthening dollar, which Yellen herself this month said was making the Fed "cautious" on raising interest rates.

Few doubt that tighter credit on Wednesday is a foregone conclusion. But as it prepares to turn a page in US monetary policy history, the Fed's recent record is a lesson that central banks can make all the difference to the real economy.