The September jobs numbers from ADP and the Labor Department were released this week. The ADP survey showed contraction in private-sector jobs for the second month in a row. Economists were looking for a gain. The Labor Department’s nonfarm payroll survey showed private-sector jobs gain, but they were more than offset by a contraction in local government employment. On balance, both employment reports were soft and fell short of expectations. With Bernanke & Co. focused on unemployment, the Fed is now almost certain to restart its money-printing campaign following its November policy meeting. The majority of the members on the board have convinced themselves that inflating asset prices through quantitative easing is an acceptable and necessary policy to foster economic recovery. At a conference last weekend, Brian Sack, the New York Fed’s markets group chief summed up the Fed’s thinking nicely. He said, “Balance-sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.”
Mr. Sack does not vote on monetary policy, but his boss, William Dudley, the president of the New York Fed and the vice chairman of the Federal Reserve board, does. Here is what Dudley said about quantitative easing in a recent speech: “Lower long-term rates would support the value of assets, including houses and equities and household net worth. “
Mr. Sack’s and Vice Chairman Dudley’s recent statements are clear endorsements of asset-price inflation as a monetary policy tool. The Fed believes it can promote recovery by keeping asset prices higher than they otherwise would be. If asset prices are higher than they otherwise would be, doesn’t that mean they are overvalued? So our monetary authorities are resorting to stock-market manipulation to stimulate the economy. Maybe it is for the good of the country. Yes, capital will be misallocated, and unsuspecting investors may make portfolio-decimating investment decisions based on the Fed’s actions, but at least GDP will have temporarily risen.
The audacity of the Fed in so casually endorsing asset-price inflation as acceptable monetary policy is unconscionable. Easy money in the early part of the last decade was the primary cause of the real-estate bubble. To Mr. Sack’s point, ultraloose monetary policy in the 2000s added to household wealth by keeping real-estate prices higher than they otherwise would have been, but look at the consequences. Homeowners overextended to buy homes they couldn’t afford, too much capacity was built up in the construction sector, and the financial system almost imploded. Three years after the recession began, GDP still hasn’t fully recovered. Maybe inflating asset prices above their intrinsic values isn’t such a good idea after all.
The Fed has done all it should to encourage recovery. The recession is over. The recovery has been anemic, but that likely has more to do with the uncertainty created by Washington than anything else. At this stage in the recovery, additional stimulus is likely to do more harm than good. Asset-price inflation creates a false and temporary prosperity with severe long-term consequences.
Jeremy Jones, CFA
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