If you haven’t heard, Bernanke is now a blogger. Which gives us a window into the Fed’s hypocrisy. Straight from the horses mouth.
A similarly confused criticism often heard is that the Fed is somehow distorting financial markets and investment decisions by keeping interest rates “artificially low.” Contrary to what sometimes seems to be alleged, the Fed cannot somehow withdraw and leave interest rates to be determined by “the markets.” The Fed’s actions determine the money supply and thus short-term interest rates; it has no choice but to set the short-term interest rate somewhere. 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! Of course, it’s legitimate to argue about where the equilibrium rate actually is at a given time, a debate that Fed policymakers engage in at their every meeting. But that doesn’t seem to be the source of the criticism.
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.
Alright, fair enough. I would have to agree with Mr. Bernanke on one thing. As the chart above illustrates, we have been in a 33 year bear market in yields. A bear market that is technically not yet over. I continue to maintain that we will see either a lower low or a double bottom at around 1.3-1.5% on a 10-Year before this bear market is finished.
The problem has to do with interpretation of the Fed’s message by investors and the Fed’s foolishness of believing in their own BS (highlighted quote). For instance, today both the Fed and most investors believe that the FED can control liquidity and stability. I continue to maintain that it is the biggest fallacy out there. Something that most people will only figure out when it is already too late and the markets are in free fall. That is the biggest risk today.
