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Investors in stocks and longer-term bonds can thank Federal Reserve Chairman Ben Bernanke for his new policy of providing information on the probable path of the federal funds target rate over the next several years.
In the first-ever forecast for multiyear rates, the Fed indicated that short-term rates likely would stay near zero until the end of 2014. Bernanke and other members of the FOMC did not commit to a permanent low-interest rate policy, but the markets believe the "Bernanke put" will keep asset prices from collapsing.
When interest rates are held too low too long, asset bubbles develop and investment funds are misdirected. Can anyone seriously believe that the runup in bond prices can continue indefinitely, or that the Fed's low interest-rate policy hasn't helped push up other asset prices, including gold and stocks?
Manipulating interest rates via central bank policy distorts the structure of asset prices and penalizes savers. Low nominal interest rates, even at low rates of inflation, can mean negative real rates. Pension plans are also harmed as promised benefits cannot be fulfilled.
In effect, the Fed's financial repression violates long-term contracts, erodes savings and increases risk taking.
The Fed is also trying to suppress longer-term rates by buying longer-term securities while reducing its stock of short-term Treasuries.
The Fed now holds 56% of its assets in long-term government bonds and 32% in mortgage-backed securities. During the press conference following the Jan. 25 FOMC meeting, Bernanke also held open the possibility of another round of quantitative easing.
Monetizing government debt and pegging interest rates are experiments in market socialism, not capitalism. The longer the Fed fails to let market forces determine rates, the more difficult the eventual adjustment will become.
Political forces will dominate as Congress pressures the Fed to keep rates low to hold down the costs of financing the massive government debt. And as long as the Fed is willing to buy that debt, the government can continue its profligacy.
Many economists still cling to Keynesian aggregate demand management as the miracle cure for a stagnant economy. And many appear to think that the Fed can stimulate real economic growth and lower unemployment by jacking up the monetary base. The lessons of the stagflation of the 1970s seem to have been forgotten.
Thus, we hear that letting inflation exceed 2% could have social benefits that outweigh the costs, that consumption (especially housing) needs to be pumped up, that saving is harmful because it cuts aggregate demand, and that artificially low interest rates stimulate investment.
Announcing his support for Commissar Sebelius' edicts on contraception, sterilization and pharmacological abortion, that noted theologian the Most Reverend Al Sharpton explained: "If we are going to have a separation of church and state, we're going to have a separation of church and state." Thanks ...
At the National Prayer Breakfast last week, seeking theological underpinning for his drive to raise taxes on the rich, President Obama invoked the highest possible authority. His policy, he testified "as a Christian," "coincides with Jesus' teaching that 'for unto whom much is given, much shall be ...
'Which of our Hispanic leaders would you consider to serve in your Cabinet?" A woman attending the last Republican debate in Florida asked this of the four Republican rivals. Oh, for crying out loud! Ethnic-based Cabinet appointees? Do we still need to go out and "seek" people of a certain color or ...
Secretary of Health and Human Services Kathleen Sebelius has announced that religiously oriented institutions — Catholic ones in particular — are going to have to cover contraception through their health care plans. Her ruling, unfair as it is toward Catholic institutions and others ...
A rising tide lifts all boats. That great phrase was coined by Jack Kemp, who believed that growth and opportunity for all is the answer to poverty. Kemp, who died three years ago, believed it was the answer to all things economic. And he was right. The best anti-poverty program is the one that ...
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One dangerous sell signal is when a stock slices through a key support level, such as the 10-week or 50-day moving average, on heavy volume.
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