Fed’s Low Interest Rates Don’t Help the Economy—Unless You’re a Bank

Fed Bank

by Kitty Testa

We’ve now had about seven years of a near-zero Federal Funds Rate, and three phases of Quantitative Easing from the Fed since the economic meltdown of 2008. Is it working? Well, yes, and no.

For most people, the most important economic indicator is personal: having a good job. Good jobs generally include a 40-hour work week, a competitive rate of compensation, paid time off, and perhaps even health insurance and a 401k. Rather than looking at the Unemployment Rate, which neglects to include those who have given up looking for work, it’s more instructive to look at the Workforce Participation Rate, which tells us what percentage of the working-age public is actually employed.

Workforce Participation

FFR Rate

The Workforce Participation Rate fell precipitously in 2009, along with the Fed interest rates, and is hovering below 63%. Low interest rates have done little to improve employment. According to the Bureau of Labor Statistics, 20.8 million Americans were working part time for noneconomic reasons, and 6.9 million were looking for full time work. Those working 35 hours or more totaled 106.6 million. That means that 21% of those who want a full time job don’t have one.

Macroeconomic theory generally states that lower interest rates should result in job growth and cure unemployment. After all, money is cheaper to borrow, which means companies can expand. There are many theories as to why low interest rates have failed to result in employment gains. Some believe it is because baby-boomers can no longer afford to retire and are working longer. If their retirement savings are in real estate or cash, that’s understandable, since home prices are still depressed and cash in the bank earns almost zero interest. Others believe that technology is replacing many jobs. Yet we see that technology also creates jobs. It is true that many companies have fewer administrative assistants, but they also have more IT positions. The phenomenon left out of these theories is the mad pace of mergers and acquisitions, which totaled $4.7 trillion in 2015. Every merger results in redundant positions, and the resulting layoffs are often permanent. When money is really, really cheap, it’s a lot easier to buyout your competitor.

There is one sector of the economy that has performed exceptionally well since the Great Recession: the Finance Sector. Sustained near-zero rates followed by Quantitative Easing, in which long-term interest rates are artificially depressed and the money supply is increased, have created a cash rich environment for investment. With deposits in banks also earning near-zero interest, there are limited investment vehicles for all that cash. Much, if not most, of it has gone into the stock market. So let’s see how the equities market has performed in relation to interest rates.

FFR Rate


Historically interest rates and the stock market appear to have very little inverse correlation, at least for the last twenty years or so. In fact the pre-recession highs in 2007 tracked with a Fed Funds Rate of 5%. But ever since the rates dropped to near zero in 2009, the Dow has risen dramatically. It is, in fact, another bubble created by the Fed’s monetary policy, one that can’t be sustained.   Whereas once stocks were analyzed for underlying value, stocks are now valued for their short-term potential. Millions of computers track the slight movements of thousands of stocks. Buys and sells are bets as opposed to investments. CEOs are painfully aware of their short-term market valuation.  Today’s stock market has little concern with the future, and executive management is less focused on long-term growth and stability.

Commercial banks still make most of their money the old-fashioned way: loans. Since the great interest rate drop of 2009, commercial lending has risen steadily, although it still has not returned to the levels of the late 1990s, when the Federal Funds Rate was around 5%-6%.

Comm Lending

You would think that this increase in lending would be spurring dramatic economic growth, but this isn’t the effect we’re seeing. Real GNP has been almost as flat as interest rates for the past several years.

Jamie Dimon, CEO of the nation’s largest bank, JP Morgan Chase, is calling on the Fed for a modest increase in interest rates, and calling on the government to invest in infrastructure to offset any fallout. This would result in increased earnings for banks. But should the government respond to any negative economic effects by creating more shovel-ready jobs?

Since 2008, the Federal government has engaged in a long list of economic bailouts and incentive programs designed to stimulate an overall economic recovery. Its efforts have failed most people in the most important way: jobs. The only way to truly achieve an employment recovery is through deregulating small businesses and the leaving the shared economy alone.

Once again the Fed is unlikely to raise interest rates when it meets next week. The Fed has manipulated the economy into a stock bubble and left most Americans in a stagnant grind of economic malaise. The Federal government tries over and over to cure the ills that government itself creates. The Fed’s mandate should be revoked so that the market can lead us to economic recovery.

Data source for all charts: The Federal Reserve St. Louis, FRED

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