Bernanke Commits to Ultra-Low Rates, Raising Worries About ‘Boom’

Bernanke Commits to Ultra-Low Rates, Raising Worries About ‘Boom’
March 27, 2012

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

The Federal Reserve appears committed to more years of historically low interest rates despite indications of an improving economy and rising price inflation, leading one economist to refer to Fed Chairman Ben Bernanke as “a madman.”

“He thinks he can get away with this money printing without stoking price inflation. Not a chance,” said economist Robert Wenzel, editor and publisher of the EconomicPolicyJournal.com Web site.

"The stock market will continue to climb and overall price inflation will accelerate,” he said, noting gasoline prices are already at all-time highs in the Chicago area and at record highs for this time of year in many other places. Other indicators of rising price inflation include higher prices for food and construction materials.

Money Depreciating 7 Percent

“The Federal Reserve money printing is now over 7 percent on an annualized rate. That is pretty much your money depreciating in your pocket by 7 percent-plus every year,” Wenzel said. “Because oil is used across the economy, general price increases usually start with oil but eventually end up pushing prices higher in every nook and cranny of the economy.”

Bernanke on March 26 told a conference of the National Association for Business Economics that the economy is still too fragile to allow market-level interest rates. Instead, to boost economic growth and further reduce the unemployment rate, the Fed must continue to manipulate interest rates to their current historically low levels.

The government’s official unemployment rate stands at 8.3 percent, down from 9 percent six months ago. Bernanke told the conference “more rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,” is needed for continued progress in lowering unemployment.

The Fed has driven short-term interest rates down to near zero. Longer-term interest rates recently have been rising, the result of bond buyers slowing their purchases of U.S. government debt. The 10-year Treasury bond rate had been as low as 1.67 percent last September but in late March had climbed to 2.38 percent, leading some analysts to speculate the bull market in bonds is about to end. Lower prices on bonds result in higher interest rates.

Fed’s Bond Buying

To keep government bonds prices high and interest rates low, the Fed has been a major buyer of bonds.

“Fed Chairman Ben Bernanke has already made two serious monetary policy mistakes. Each has had devastating consequences for most Americans. His current policy represents a third major mistake,” said economist and financial adviser Robert Genetski.

Bernanke’s first monetary policy mistake, Genetski said, was as a Fed member from 2002 to 2005 when he “voted for the inflationary policies that created a speculative boom in the economy and specifically in housing.” The second was after he became Fed chairman and “engineered a highly restrictive policy which ushered in the worst collapse in spending since the 1930s.”

Bernanke’s current policy of promising to keep interest rates artificially low for the next two years will prove to be another painful mistake, Genetski said. He noted Fed policies last year produced an increase in bank reserves of more than 20 percent.

‘Early Indicator of Excess Liquidity’

“Bank reserves represent the first step in the process of increasing the money supply,” Genetski said. “The increase in reserves produced a 10 percent increase in other key money measures. The impact of the last year’s monetary stimulus is already working its way through financial markets. Soaring stock prices are an early indicator of excess liquidity. Next, the Fed’s increase in liquidity will produce a sharp increase in spending.

“It’s often difficult for the Fed to raise interest rates rapidly enough to avoid a speculative boom,” Genetski added. “In 2004 the Fed failed to do so even though there was no advance commitment to keep rates low. By making such a commitment, Chairman Bernanke will make such a decision even more difficult.”

Genetski says the commitment to low interest rates for an extended period places an additional barrier in the path toward attaining monetary stability.

“It is a decision that sets the stage for significantly higher inflation and another destabilizing speculative boom,” he said.

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)