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The Federal Reserve and Congress are playing 'a very dangerous game'
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Not the safest activity.
The Federal Reserve's first rate hike in nearly a decade came in December with a sigh of relief, or at least exhaustion, after months of speculation over the move.
Since then the economy has not been showing encouraging signs of taking the policy action in stride.
Plummeting stock prices and mixed economic data have made the Fed's historic liftoff look shaky.
Furthermore, growing concerns over a recession have left analysts worried if the Fed would be able to stimulate the economy in a pinch.
According to Lindsey Piegza, chief economist at Stifel Nicolaus, the possibility of a recession — or even a continued sluggish economy — has the Fed and lawmakers caught in a vicious circle.
"With rates this low they're playing a very dangerous game," Piegza told Business Insider.
Piegza's worry is that the recovery has been weak and interest rates are still very low, so when another recession rolls around the only recourse would be to go back to quantitative easing.
In this scenario, the federal government would need to spend to stimulate the economy (just like in 2008), and the Fed would purchase a hefty amount of the debt (again like in 2008) adding to its current $2.5 trillion trove of US Treasuries.
"The worry is that the Fed basically becomes a subsidiary of the federal government," said Piegza. "It's like borrowing from Peter to pay Paul, eventually something has to give."
In time, it is going to be unsustainable for the Federal Reserve to purchase any more of the debt or it will simply exist as a hole for the government to dump debt into, Piegza added.
Furthermore, Piegza also thinks this low-rate, debt-buying cycle could continue for a long time. She noted that since the 1980s, each business cycle has seen the Fed funds interest rate peak lower and lower.
When asked if the Fed could go back to zero percent interest rates for an even lengthier amount of time than the seven year stretch that just ended, Piegza told us that it isn't out of the question.
"It could easily be the new normal," she said. "If the US doesn't figure out how to improve economic growth, zero interest rates could become standard."
(Business Insider/Andy Kiersz, data from FRED)
While Piegza has been critical of the Fed's decision to lift rates in December, including telling us they "have gone off the deep end," she doesn't pin the blame for this dismal long-term outlook on the Fed, but rather lawmakers.
"The Fed did everything they could, but it didn't work like it normally does," she said. "They're scratching their heads and saying, 'We did what we were supposed to do but it didn't work, the economy isn't recovering like it should.'"
The cause, in her opinion, is a lack of capital spending by businesses. This usually drives recoveries since it creates sustainable jobs and gets cash flowing throughout the economy.
So far in this expansion capital spending has been anemic. Goldman Sachs called it "stagnant" in a recent note, and wrote that it should decline for most business sectors through 2017. According to Piegza, this is due to political moves over the past few decades.
"We have to give businesses the room to grow," emphasized Piegza. "Political leaders need to make moves that encourage business. Reduce the tax burden, roll back regulations, that's how you get a strong economy and make it more likely for business to spend."
Piegza said that it isn't one particular administration or decision that has gotten the US to this pint, but rather the accumulation of policy over time.
When it comes down to it, she said without serious political change it will be impossible to get the economy back in high gear and break the cycle of debt creation and buying between the federal government and Federal Reserve.
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