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4 questions the Fed statement didn't answer

| MoneyRates.com Senior Financial Analyst, CFA
min read

The statement from this week's meeting of the Federal Open Market Committee (FOMC) indicated that the Fed will stay the course in its program of using low interest rates to stimulate the economy. The FOMC statement included a mild rebuke of fiscal policy, but no real surprises or new initiatives.

But while there was nothing unexpected in what the Fed had to say, there are some unanswered questions pertaining to what the latest statement didn't say.

What the FOMC had to say

The FOMC statement noted that the economy was expanding at a moderate pace, and expressed the view that this would continue as long as the Fed maintained its accommodative policies. Therefore, the Fed said those policies would continue until either unemployment reached 6.5 percent, or inflation threatened to significantly exceed the Fed's 2 percent target. The policies in question include keeping short-term interest rates near zero, and making monthly purchases of $40 billion in mortgage-backed securities and $45 billion in long-term Treasuries.

While mostly noting positive developments in the recent economy, the FOMC statement did describe fiscal policy as "restraining economic growth." This presumably is a reference to sequestration, which has forced a series of federal budget cuts.

Unanswered questions

While that reference to fiscal policy was one of the few discouraging notes in the FOMC statement, there are some serious, unanswered questions that economists and investors are increasingly asking about the Fed's low-interest-rate policy. Here are some examples:

  1. Are low interest rates creating asset bubbles? Despite mediocre economic news, stock prices recently reached a new high as investors look for alternatives to ultra-low Treasury and savings account interest rates. The danger is that the Fed's low interest rate policy may be creating a bubble in stock prices, as well as in the prices of the mortgage-backed and Treasury securities it is buying at a combined rate of more than $1 trillion a year.
  2. Has the real estate market become dependent on ultra-low mortgage rates? Real estate hasn't rallied enough yet to be described as a price bubble, but with mortgage rates having been so low for so long, it raises the question of whether housing prices could survive a return of rates to more normal levels.
  3. Has low interest hurt personal savings rates? Low interest rates are designed to be an incentive to borrow and spend, which means they are a disincentive to save. This could be putting the financial future of many Americans on even shakier ground.
  4. Is the policy working? Under normal circumstances, low interest rates should stimulate growth, but it remains to be seen whether this will work when borrowers are already overextended. Is the policy working? Perhaps you can't definitively answer "no," but you can answer "not yet."

You can credit the Fed with being consistent in its monetary policy approach. But the longer it takes for that approach to get the economy up to speed, the more troubling these unanswered questions will become.

Lihjtfoot 3 May 2013 at 1:55 am

Ben may be an educated man, but the man is WRONG. He could do this for the next 40 years, and it STILL would be a COMPLETE failure. Bernanke just doesn't understand finance!!

Frank 2 May 2013 at 11:18 pm

Answers to questions 1-3: YES Answer to question 4: NOBernanke's Fed has intentionally created yet another stock market and housing bubble in order to make people 'feel' wealthy and spend the economy out of the doldrums. It ain't happening folks.