Why Millennials Should Pay Attention to Monetary Policy

With all the media coverage of the Federal Reserve, it is surprising that few commentators have discussed how U.S. monetary policy harms millennials. Though monetary policy often flies below the radar of tax and regulatory reform, this is unfortunate--misguided actions by the Fed can and do have major negative effects, especially on young people.

For instance, the Fed plays favorites with different demographics, there is growing political influence on monetary policy, and future prosperity is threatened when policymakers play with the value of the dollar. 

Today, despite the Federal Reserve's long-run, overly-accommodative monetary policy that seems to have no end, the economic recovery has failed to gain momentum. A slow economy disproportionately affects new entrants to the labor force. Bureau of Labor Statistics data show that the unemployment rate for 20- to 24-year olds in June was 10 percent, compared to 4 percent for those 25 and over. The teen unemployment rate was 18 percent.

Professors have undoubtedly told students that the way the Federal Reserve can make the economy grow is by pumping out dollars and stimulating demand. The Federal Reserve has been working at this for over six years now, yet the United States has experienced one of the slowest recoveries in history. Plus, Federal Reserve policy has created economic winners and losers. Easy money has benefitted middle-aged, middle-class households, at least in the short-term. 

The Fed's policies have resulted in inflated values for housing. But young Americans do not own houses. In the first quarter of 2015, homeownership for Americans under 35 years old declined to 35 percent--the lowest on record since the Census Bureau began tracking these statistics in 1982.

The Fed-fueled increase in housing prices makes it difficult for young people to get mortgages, though low interest rates make it easier for those who already have large mortgages to refinance at lower rates. Buying a home is artificially expensive and out of reach for the many millennials who are already facing poor employment prospects. 

Another type of asset whose value has risen, in part, due to the Federal Reserve's policies is equities. The stock market's performance has artificially increased the value of pension plans and retirement accounts. Investors continue to move into the stock market in search of higher returns, driving up equities. But young Americans have not had the chance to accumulate retirement accounts, and they have not worked long enough to qualify for pensions. Fewer than one-third of households headed by a person under 35 years old have any type of IRA, compared with half of households headed by a person between 55 and 64 years old.

The fundamental problem is that with booming entitlement spending, an internationally-uncompetitive corporate tax rate, and annual regulatory costs over $1 trillion, many Americans appeal to the head of the Federal Reserve to help the economy. But Janet Yellen cannot cure all the economic problems that afflict millennials.

Instead of basing policy on each monthly jobs figures release, the Fed should pursue a clearly-stated goal of low and stable inflation though a pre-determined inflation target. A single price-stability mandate would insulate Federal Reserve officials from congressional critics who lambast them for not doing more to reduce short-term unemployment, which can undermine a commitment to long-term price stability. Politicians avoid forcing central banks to follow clear rules precisely because doing so would cripple their ability to influence monetary policymakers.

Increased political influence on the Federal Reserve does not stop with employment targeting. The subprime mortgage meltdown was perpetuated by a political environment in which the Fed operated as a regulator, not a central bank. As Columbia University professor Charles Calomiris chronicles, in the pre-recession bank merger wave, the Federal Reserve signed off on hundreds of risky bank mergers that were blatant political bargains between megabanks and activists. Banks received political support for proposed mergers only after agreeing to direct billions of dollars to activist groups. The Federal Reserve, afraid of the political blowback that would accompany nixing these unsuitable deals, never made an effort to stop them.

There are many reasons besides the disparate effect on youth and growing political influence on the Federal Reserve to worry about U.S. monetary policy. Since money acts as a store of value, people are led to believe that government increasing the money supply makes everyone richer. But, while the public may have more money, people are not any wealthier than before. Instead, the result is increased prices for everyone and a reduced faith in money's exchange value. This can create dangerous consequences since money is worth nothing on its own--try producing anything from a flimsy green piece of paper. 

Mutual faith that the dollar will hold its value and be accepted by others in future transactions is necessary for money to perform its function as a medium of exchange. Inflation has the potential to undermine both of these foundations, and the Federal Reserve does not have an impressive track record of meeting its goals--the dollar's purchasing power has declined by over 80 percent since the early 1970s. Additionally, Carnegie Mellon University professor Alan Meltzer shows that over the first 100 years of Federal Reserve history, the United States enjoyed both price stability and the absence of banking crises in only about a quarter of those years.

Unfortunately, mistakes and failures tend to lead to expanded discretionary powers for policymakers--and this vicious cycle applies to the Federal Reserve as well. For example, under new powers granted by Dodd-Frank, the Federal Reserve gets to regulate financial entities, including some large insurance companies that are not banks.

In his book Money, Steve Forbes compares poor monetary policy to carbon monoxide: "Odorless and colorless. Most people don't realize the damage it's doing until it's very nearly too late." Monetary policy history confirms that whenever interest rates remain too artificially low for too long, distortions in financial markets arise, along with inflation. Alternatively, historical evidence shows that interest rate increases during the early-to-middle stages of economic expansions do not endanger economic growth. They are only meant to bring monetary policy more in line with what is normal, based on experience from the past, and prevent inflation from rising above target down the road. This then sets the stage for prolonged future economic growth and prosperity. 

Short-term winners, including some investors and homeowners, are currently benefiting from the Federal Reserve's policies, but the young and the economy as a whole are losers. Simply put, printing money and weakening the value of a currency does not lead to future prosperity. It is time for a change from both politicians and the Federal Reserve--for the sake of millennials as well as the rest of America.

Jared Meyer is a fellow at the Manhattan Institute. He is the coauthor with Diana Furchtgott-Roth of Disinherited: How Washington Is Betraying America's Young. Follow Jared on Twitter here.

Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.