He was sworn in as Fed chairman in early unaware that fissures were opening in the foundations of the U. Two years later, he was rescuer-in-chief during the worst financial crisis in 75 years.
His mantra: Whatever it takes. In the past few years, Mr. Bernanke has been presiding over an historic experiment in monetary policy — more than five years of zero interest rates so far and trillions of dollars in bond-buying, a controversial approach aimed at restoring growth to the American economy.
He will, instead, have time to reflect on what just happened. Actually the Fed chairman has made similar statements going back to May, and the gist of them is: All things must come to an end and so will QE3.
But when it occurs depends strictly on the economy. Fed watchers employed by Wall Street firms had to glean the news indirectly. Meanwhile, investors keep looking for certainty in an uncertain world.
The economic recovery is just too weak and inflation too low for this Fed to tighten soon, especially with China slowing and Europe and Japan just bumping along. Howard R. Gold is a columnist for MarketWatch and editor at large for MoneyShow.
This sounds very textbook-y, but failure to understand this point has led to some confused critiques of Fed policy. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings.
I was concerned about those seniors as well. In the weak but recovering economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative. A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments.
The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again. This is hardly a hypothetical scenario: In recent years, several major central banks have prematurely raised interest rates, only to be forced by a worsening economy to backpedal and retract the increases.
Ultimately, the best way to improve the returns attainable by savers was to do what the Fed actually did: keep rates low closer to the low equilibrium rate , so that the economy could recover and more quickly reach the point of producing healthier investment returns.
So where should that be? The best strategy for the Fed I can think of is to set rates at a level consistent with the healthy operation of the economy over the medium term, that is, at the today, low equilibrium rate. There is absolutely nothing artificial about that! The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns.
This helps explain why real interest rates are low throughout the industrialized world, not just in the United States. Ben S. Ben Bernanke. Bernanke also served as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. The Hutchins Center on Fiscal and Monetary Policy provides independent, non-partisan analysis of fiscal and monetary policy issues in order to improve the quality and effectiveness of those policies and public understanding of them.
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