Currently, the Fed is holding short term rates at historic lows; it has declared that it will keep rates extraordinarily low through mid-2013. Consider the context of this action:
- Retail sales up 8.5% versus a year ago (July 2011)
- Producer prices up 7.0% versus a year ago (June 2011)
- Consumer borrowing up 1.7% versus a year ago (June 2011)
- Jobs up 1.3 million versus a year ago (July 2011)
- Durable goods orders up 7.9% versus a year ago (June 2011)
- Personal income up 5.0% versus a year ago (June 2011)
- Industrial production up 3.4% versus a year ago (June 2011)
- Consumer price index up 3.6% versus a year ago (June 2011)
The media seems to be upset that GDP growth has been "low" in 2011 (0.4% in Q1 and 1.3% in Q2), but those that whine about GDP growth don't seem to recognize the increased personal saving rate---it dropped from 12% to 2% between 1981 and 2007, but is now hovering around 5%. The rates of growth we're used to (80s, 90s, 2000s) are artificially high because they relied on a decrease in the savings rate. Now that the savings rate has increased, there just isn't as much money available for spending/growth. So, average GDP growth of 2% might be normal for the foreseeable future. Note that GDP is stated in "real" terms, i.e. inflation adjusted, so inflation can hurt just as much as a lack of economic activity.
Based on the above numbers, it seems to me that the Fed should be at least as concerned about inflation as it is about economic activity. Consumer prices are up 3.6% and producer prices are up a whopping 7.0%. Most national banks try to keep inflation around 2%. It was one thing to keep rates near zero when prices were flat-to-negative, but keeping interest rates so low while prices are moving up strongly is dangerous. It appears to me that this inflation is what is hurting GDP growth now. Though personal income has risen 5.0% in the past year, real income growth has only risen appx. 1.4% (due to the 3.6% increase in consumer prices). A year ago, GDP growth was much stronger because personal income was still around 5% but consumer prices were increasing at a rate of about 1%.
I doubt the Fed is listening, but if they are, consider this a plea: please raise the federal funds rate. If the above argument doesn't convince you, consider that you can't go below 0%. If the federal funds rate isn't increased and there is another shock to the U.S. economy in the next year or two, the Fed won't be able to help.