Reasons Remain for Fed to Keep Easy-Money Policies Fueling Equities

Plenty of compelling reasons exist for the Federal Open Market Committee to maintain its easy-money policies that have kept the stock market rising.

Concerns that the policies aimed at keeping interest rates about as low as they can go are understandable but easy-money proponents at the Fed can cite a number of recent economic reports and corporate earnings shortfalls to confirm that the U.S. economy remains weak. However, investors are wise to recognize that the Fed ultimately will reverse course when inflation returns and unemployment rates fall below the current politically hazardous level of 7.5 percent.

First, the price of gold, which is a traditional hedge against inflation, fell today for the seventh consecutive trading session and its longest slump in four years. If inflation was a true risk, gold would be rising rather than falling. Fed officials can use the sliding gold prices as a key reason to keep interest rates low.

Second, Wal-Mart is among a number of corporations that recently reported weaker-than-expected sales. Wal-Mart’s management expressed concern that its budget-conscious shoppers are scaling back their spending, and executives cited the company’s fading financial results as proof that prices need to be kept low to cater to customers.

Third, construction of new homes in the United States fell 16.5 percent in April to a seasonally adjusted annual rate of 853,000 units, marking the lowest level since last November. Builders acknowledged delaying the release of new houses or boosting new home prices. Both factors contribute toward putting home ownership further out of the reach of prospective buyers.

Fourth, consumer prices fell 0.4 percent in April for a second straight month of decline, the Labor Department reported yesterday. That slippage brings down the average annual increase in the Consumer Price Index to 1.7 percent, when excluding food and energy, falling below the 2 percent mark that Fed officials favor for a healthy economy.

Fifth, Europe’s economy seems to be sliding rather than recovering. Indeed, the euro-zone economy shriveled further during the first quarter of 2013 to mark an unprecedented sixth successive quarterly economic fall in the region. France, one of Europe’s biggest economies, slipped into recession, and Germany, Europe’s largest economy, barely grew, according to first-quarter data released Wednesday by Eurostat, the European Union’s statistical agency.

Sixth, a reversal of the Fed’s current easy-money policy to stimulate growth would be contrary to its public mission of maximizing full employment, as well as maintaining stable prices and moderate long-term interest rates. With unemployment around 7.5% and many workers taking part-time positions rather than full-time jobs that they would prefer, the Fed is far from achieving its goal of restoring full employment.

The only people who seem to be encouraged about the economy right now are members of the general public. Consumer sentiment is climbing, and investors still are bidding up the price of equities in search of heightened returns that the interest paid on savings accounts cannot match. Many of those people may be the ones who have taken on too much debt in the past, and Fed officials need to look beyond the scope of financially unsophisticated laymen in carrying out its mission.

Unless much more positive indicators about the U.S. economy arise in the coming weeks and months, any change in the Fed’s easy-money policy as soon as this summer seems slim.

Paul Dykewicz is a seasoned journalist who is the editorial director of the Financial Publications Group at Eagle Publishing and the editor of the Eagle Daily Investor website. He also edits five monthly investment newsletters, Forecasts & Strategies, Successful Investing, High Monthly Income, Alpha Investor Letter and PowerTrend Profits, as well as a number of time-sensitive trading services.