Time For The Fed To Raise Short-Term Interest Rates To Boost The Economy

The Fed has held short term interest rates, during and after the recession, at close to zero level in an attempt to jump start the US economy, but to little avail. GDP growth is slow. Employment growth is weak and housing has not recovered in either prices or construction activity. The other tools the Fed tried to lower the longer end of the maturity curve have also not added to the strength of the economic recovery.

As reported in Bloomberg, the US Census Bureau reported that many households experienced a loss of income from rents, dividends and interest payments.

The Fed's actions have failed to grow the housing market. It cannot control or affect corporate dividends, but the Fed can raise short term interest rates.

Higher short term rates will put more money into households' pockets. With the additional income, households will spend more and the economy will grow faster than it has. A rise in short term rates will neither affect the housing market nor corporate investment.

It is time for the Fed to shift gears and add spendable income to the economy and households by raising short term rates. The Fed's efforts at the shorter end of the yield curve have not boosted the economy to an acceptable rate of growth. Its actions have been ineffective and the loss of household income from the extended period of lower rates may have actually been harmful and delayed the economic recovery.

From Bloomberg, "Plummeting Income Shaves Household Cash" by Frank Bass and Timothy R. Homan:

The housing market collapse, historically low interest rates and corporations stingy with dividends helped cut the median household income in two of every three U.S. counties, the U.S. Census Bureau reported today.

The number of American households that made money from rent, interest or dividends fell by one-third to 24.2 percent in 2010, even in affluent counties including those that encompass New York City and San Francisco.