Fed Officials Said Low Rates May Fuel Speculation – Ya Think?

December 2, 2009 by · Leave a Comment
Filed under: Stock Market News 

May?  I would say that low interest rates for low or extended periods of time, always creates speculation.  It is not because people are greedy but more they are “forced” to speculate on other and riskier asset classes that traditional government debt like Treasuries.  Many investors rely on fixed income investments because they need a guaranteed rate of return, like retirees, pensions funds and insurance companies.

When we keep rates artificially low, they are forced to invest in other assets even if they are fundamentally not sound investments, when enough money does this, you see prices rise even during a bad economics environment.  Right now with 10% plus unemployment in the United States, I would say that is happening right now.

Federal Reserve officials said record-low interest rates might fuel “excessive” speculation in financial markets and possibly dislodge expectations for low inflation, according to minutes of their meeting released today.

“Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period,” minutes of the Nov. 3-4 meeting said, “including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations.”

While policy makers agreed that the chances of such effects were “relatively low, they would remain alert to these risks,” the minutes showed. Fed officials at their meeting indicated the benchmark lending rate would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline.

Source: Bloomberg

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