One Federal Reserve official doesn’t see any element of the market in bubble territory, even with years of zero-interest rate policy, cheap money and $4 trillion of new money added to the economy.
Fed Governor Jerome Powell, a former Wall Street lawyer and investment banker, told CNBC in an interview that low rates instituted by the United States central bank are not producing a bubble at all, though some contrarian investors would scoff at such a remark.
Many economists expect the Fed to raise interest rates in the middle of next year. However, Powell said that hiking rates would all depend on the progress of the U.S. economy, the state of the labor market and reaching the inflation target rate of two percent.
Powell averred that “the time to raise rates is coming. It’s not here yet.”
“We’ve had very good job creation this year. In fact, this year is on track to be the best job creation year since 1999 if the current pace keeps up for the rest of the year,” he continued. “Inflation is a little bit below target. But I’d expect that to go up to our 2 percent target as slack comes out of the economy.”
For some reason or another, the Fed persists in ignoring the evidence to suggest that low interest rates produce bubbles. Earlier this year, then-Fed Chair Ben Bernanke purported that low rates didn’t create the housing bubble a few years ago, though that’s a tad disingenuous considering that there is an abundance of reports highlighting the contrary.
Low rates do create bubbles, and they are currently doing so today. A sustained period of artificially low interest rates incites immense credit creation, which then leads to excessive capital spending that then becomes the cause of rampant malinvestment. When the credit crunch has reached its peak then a recession or crash transpires, much like what happened in the economic collapse in 2008.
Even Fed Chair Janet Yellen has conceded that some stocks are entering the bubble phase, and noted that she won’t raise interest rates just to burst them, suggesting that the central bank’s policy of zero interest rates are the culprit for these bubbles.
“I do not presently see a need for monetary policy to deviate from a primary focus on attaining prices stability and maximize employment, in order to address financial stability concerns,” the Fed Chair told an audience at an International Monetary Fund (IMF) lecture in Washington on Wednesday.
Here is what former Texas Republican Congressman and three-time presidential candidate Ron Paul said in an interview this past summer regarding interest rates, bubbles and the stock market:
“One thing we have to remember is that when you get false information from artificially low interest rates, that mistakes are made, they’re inevitable. You make mistakes even when you have market rates of interest. But when the market rate of interest is so low for everybody, there’s a lot of mistakes, and that’s why you have the bubbles, and that’s why you go through the catastrophe we had in ’08 and ’09, and I think the conditions are every bit as bad as they were in ’08 and ’09.”
Whether or not the Fed boosts rates next year is quite irrelevant. The Fed should allow the market to determine what interest rates should be.
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