The Fed Cannot Control Its Easy-Money Monster
One of the more important parlor games macroeconomists and Wall Streeters are playing is guessing when the Federal Reserve will finally stop keeping long-term interest rates at historically low levels.
The Fed’s policy, which began in the wake of the 2008 financial crisis, even has a name: quantitative easing (Q.E.), Fed-speak for when the central bank goes into the market, month after month, to buy Treasury bonds, mortgage-backed securities and other forms of long-term credit to drive up the price of these securities and lower their yields. In effect, this keeps long-term interest rates lower than they otherwise would be.
In the wake of the Great Recession and the onset of the Covid-19 pandemic in March 2020, that has proved to be an effective short-term strategy to kick-start the economy. But many people wonder if Jerome Powell, the chairman of the Fed, has reckoned with the power of the easy-money monster the central bank spawned all those years ago. They worry that Mr. Powell has helped inflate bubbles in housing, lumber, copper, Bitcoin and stocks, bonds and other assets. The evidence is mounting: The Consumer Price Index, a gauge of inflation, rose 5 percent in May from a severely depressed number a year earlier — the fastest rate in nearly 13 years. And that’s just one worrisome indicator.
It’s unclear whether the Fed has the will — or the ability — to end all this. Or if it even knows how to taper the bond-buying program without sending interest rates sky high, choking off the nascent economic recovery and freaking out everyone now addicted to low interest rates.
