Fed’s Donald Kohn wants to use low interest rates to encourge people into riskier assets

November 18, 2009 by · Leave a Comment
Filed under: Policy News 

I love the opening line of this press release:  The Federal Reserve’s low interest rate policy is meant to encourage investors to move into riskier assets in order to promote economic recovery. Let me translate this, we have chosen to punish savers by making interest rates at close to zero so instead of investing in U.S. treasuries which are considered the “safest” form of investment we want you to speculate on risky investments in the middle of a “jobless recovery” that sounds suspiciously like a recession.  I don’t see how getting people to invest in other assets is somehow connected to making credit easier to access.  Interest rates clearly don’t reflect the real risk in the economy at present.

Reuters, Chicago – The Federal Reserve’s low interest rate policy is meant to encourage investors to move into riskier assets in order to promote economic recovery, and there are no signs currently the policy is resulting in the build-up of a U.S. asset bubble, the central bank’s number-two official said on Monday.

Fed Vice Chairman Donald Kohn said the recent rise in asset prices reflects several factors: the reversal of the “extreme panicky conditions” of late 2008, the turnaround in economic prospects, and ultra-low interest rate policies in the United States and other key economies.

Many investors, scarred by the damage wrought by the bursting of the housing bubble, are wary of the potential of new bubbles building as a result of ultra-low interest rates in key countries.

Kohn underscored why the low rates are critical to an economic recovery.

Source:  Reuters

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