LAKE FOREST, Ill.—The Federal Reserve’s “inability to effectively determine interest rates and manage money” is hurting credit u
Michael Moebs
nions’ bottom lines, says one economist.
What the Fed should be doing instead, says Michael Moebs, is heeding the lessons of William McChesney Martin, Jr.
“The Fed is increasing interest rates when it should be increasing money stock or deposits. This hurts banks and credit unions because it leads to economic instability and drives up the rates on auto loans and mortgages, while reducing the amount of business consumers will do,” said Moebs, economist and CEO at Moebs $ervices. “Bottom line is the Fed rate increases hurt credit unions’ bottom lines.”
Moebs believes the Fed’s inability to be effective in rate setting is due to the agency’s focus only on the price of money and not balancing rates with the supply of money, or money stock.
“The Fed acts like a one-arm paper hanger in how it tries to manage the economy,” said Moebs. “When the Fed balances price and money, it achieves economic stability and growth.”
Money stock growth for the last century has been turbulent. Fluctuations in the growth of money have ranged from a negative 39.3% to a high of 41.5%. The average and median rate of change of money stock over the last 103 years has been 6.8%, explained Moebs.
“Maintaining consistent money stock growth along with pricing changes in interest rates provides stability. The Fed for the past almost 50 years has concentrated only on interest rate changes to control inflation and keep unemployment low,” Moebs said.
What Exactly Is Money Stock?
Moebs explained money stock is insured transaction accounts, both consumer and business, along with insured savings and uninsured savings. Change in money stock is calculated by comparing the quarter of one year with the same quarter of the following year measuring the rate of change (see chart).
“William McChesney Martin, Jr., who served as Federal Reserve Chair from April 2, 1951 to Jan. 31, 1970, is the Fed Chair with the best record maintaining stable money stock growth closest to the century long norm of 6.8%,” said Moebs. “Martin is also the best Fed Chair in over a hundred years in providing economic stability and growth in the economy. Martin accomplished this for 20 years despite a turbulent period marked by three wars–Korea, Cold War, and much of Vietnam—a recession in 1959, paying down WWII debt, and some balanced budgets.”
Moebs’ explained that during his 20-year tenure, Martin achieved the following:
- Inflation from 1951 to 1970 averaged 2.46%
- Unemployment during Martin’s era averaged 4.62%
- The 10-year T-Bond, a key market indicator, averaged 4%, with a high of 7.79% and low of 2.48%
- Martin made 32 rate changes in 20 years, not exceeding three a year, and 25% with no yearly change
- Martin maintained very stable money stock growth at 6.8% for 20 years
“Of the 16 Federal Reserve chairs in the Fed’s 100-plus years, only Martin has achieved economic stability and growth, and he did it with a balance of money stock and interest rate pricing,” explained Moebs, “and, most important the economy and markets flourished during his term. All Fed chairs since Martin have used only price to control inflation and unemployment—the two economic mandates of Congress.”
Steps FIs Need To Take
Faced with economic instability, what should FIs expect and do? Moebs offered these suggestions:
“Wait for fiscal policy, i.e., tax reform, to kick in money supply growth by the fourth quarter of 2018 to get the money stock back to normal and grow the economy,” Moebs said. “If the Fed increases rates with no money stock support, be prepared to see consumers cut back on auto and mortgage purchases, and businesses wait on acquiring equipment and hiring.
“Be cautious in lending money and prudent in raising deposit rates until the economy sees money supply kicking in along with rate increases,” continued Moebs. “The Fed needs to follow the leadership of its best Fed Chair—William McChesney Martin Jr., and achieve a balanced approach of price and money supply.”
