Does the Federal Reserve Really Matter?

On the campaign trail, then-candidate Donald Trump occasionally took aim at Federal Reserve Chairwoman Janet Yellen. For example, Trump accused Yellen and the Fed of running "a false economy," and being politically partisan, with low-interest-rate policies meant to boost both Hillary Clinton and President Barack Obama.

With Yellen and the Fed, however, the real issue is not necessarily about being political; it's about whether or not the Fed really matters. Looking at monetary policy over the past eight-plus years, either the Fed, at best, doesn't matter all that much, or its attempted manipulation of the economy has been a negative.

While speculating on Yellen's status relative to President-elect Trump gets attention in Wall Street and Washington circles, when talking with small business owners on Main Street, if you will, over the years, I rarely heard much about the Fed and monetary policy, that is, until late summer 2008. That's when the Fed adopted an unprecedented and previously unfathomable loose monetary policy. Since then, the Fed has come up in assorted conversations, with the question being: Do Yellen, her predecessor, Ben Bernanke, and others at the Fed have a clue as to what they're doing?

Yellen, Bernanke and Company talked themselves, along with assorted Fed watchers, into the idea that they somehow saved the U.S. economy by running breathtakingly loose monetary policy. Such musings amount to economic fantasy.

Consider that the Fed has greatest control over the monetary base - that is, the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve). The expansion in the monetary base has been nothing less than jaw-dropping, moving from $875 billion in August 2008 to $3.64 trillion this month. It's critical to point out that this massive expansion in the monetary base has largely translated into skyrocketing excess bank reserves, which went from a mere $1.9 billion in August 2008 to $2 trillion last month. That means more than 70 percent of the increase in the monetary base has merely sat as excess bank reserves.

To further drive home this point, a February 2015 analysis of excess reserves by the Cleveland Fed Reserve Bank noted, "From 1959 to just before the financial crisis, ... excess reserves as a percent of total reserves in the banking system were nearly constant, rarely exceeding 5.0 percent. Only in times of extreme uncertainty and economic distress did excess reserves rise significantly as a percent of total reserves; the largest such increase occurred in September 2001." According to the latest data from the Federal Reserve, excess reserves now stand at 94 percent of total reserves.

So, where's the growth promised from such aggressive Fed actions?

We moved from a long, deep recession to one of the worst recovery/expansion periods on record, with real GDP growth coming in at less than half of where it should be (a 2.1 percent real average growth rate since mid-2009 vs. an average 4.3 percent rate during recovery/expansion periods over the past six decades).

The Fed's unprecedented expansionary monetary policy, at best, accomplished nothing.

If the Fed's loose money gambit has had any impact, it's been negative by adding to the policy uncertainties and costs that have hampered growth. Entrepreneurs, investors and business executives have no clue as to what the ultimate impact of the Fed's eight-plus-year experiment will be. Will sky-high levels of bank reserves eventually translate into liquidity-driven inflation? How can the Fed reduce reserves without creating other negatives or distortions? Uncertain private players, though, are not alone, since Fed policymakers don't have a clue either.

In the end, the Fed's loose money did not save the economy. Rather, it either didn't matter, or it added to our economy's woes.