Friday’s `Wall Street Journal <b:>`_ had an Opinion piece by `H.C. Wainwright & Co. Economics <i:http://www.hcwe.com/>`_ David Ranson and Penny Russell entitled `”Does the Fed Matter?” <i:http://online.wsj.com/article/SB118006080782614341-search.html?KEYWORDS=Does+the+Fed+Matter%3F&COLLECTION=wsjie/6month>`_. The op-ed cites a delining impact on real consumption of 100-basis point tightenings with the current 1994-2004 period being even a slight 0.01% negative (positive on consumption).
The authors say, “The influence of interest rates on growth and spending has essentially vanished. That’s not a bad thing.” I believe both that the influence of any institution or individual, particularly a government employed one that goes home at 5pm, is overstated.
But more important is likely the understatement of the positive impact of higher rates. Recently, I’ve at times believed that that lower higher rates actually harm the economy and higher rates strengthen the economy. It’s certainly felt that way during some periods of the most recent easing and tightening cycles. (I compared it to a Star Trek episode where they kept gunning the engines and the resistance strengthens — if you can’t go forward, go back, man!)
Of course I’m biased in favor of the saver and of money market mutual funds, which have been one variable getting stronger and stronger during the periods observed. Savers have strengthened dramatically over the past tightening cycle as short-term rates rose from 1% to 5.25%.
On $2 trillion in money fund assets (now $2.5 trillion), every percentage point increase represents $40 billion in income. So 4.25% has brought $90 billion a year in interest income to the pockets of the saver economy. While bank savings (with $3.8 trillion) alas haven’t seen rates rise nearly as much, they’ve undoubtely added (and are still in the process of adding) another $100 billion or so.
