The recent unwinding of Federal Reserve Bank’s quantitative easing (QE) program introduced in the aftermath of the 2008 economic recession caused ripple effects in many markets across the globe. While there was a need to normalize the Fed’s balance sheet after it was increased significantly to help businesses and economy recover from the 2008 economic downturn, it is ill-timed and will not make any significant effect in stabilizing the economy.
The metrics used by the Fed to benchmark their normalization initiatives are weak and ineffective in stabilizing the economy as intended. The Fed banked on the growing employment rates to increase inflation on consumer goods and hence, increased inflation rate. However, the inflation rate has maintained a downward that is bound to hold steady for the coming months. This is due to a variety of factors including the high number of low-paying jobs. Consequently, the wage rate has failed to increase as projected, which would have led to an increase in the inflation rate.
The stabilizing effect of rising wages and increasing employment figures would have provided a more robust pillar to hinge economic stability. It would increase disposable income and consumer spending and saving power. Therefore, the intended increase in borrowing rates as a result of the normalization would have been beneficial for the economy. However, increasing the borrowing rates while the spending power has not increased significantly will lead to increased risky borrowing. Consequently, more Americans will potentially find themselves reeling from debts. All these are recipes for a potentially damaging downward trend which may spiral out of control. The country might find itself at the bottom of a familiar ditch.