Who, then, hates low interest rates? Investors, along with people who live off their savings. There is nowhere to turn to get a return on an investment without taking unjustifiable risks. And risk is being mispriced everywhere. For years, investors have plowed into the stock market because their assessment of the risk and reward ratio there made more sense than in the bond market. That trade paid off, at least early on in the Q.E. experiment.
But now the stock market is at all-time highs, too. What are investors to do in an era in which the Fed has manipulated interest rates to their lowest levels ever without any sign, or willingness, to change course? It’s no wonder manias abound, in meme stocks like Game Stop and AMC, in cryptocurrencies such as Bitcoin and Dogecoin, in the bizarre phenomenon of nonfungible tokens and in the crazy story of the $113 million deli in Paulsboro, N.J. There are few traditional — read: safer — places investors can turn to get the outsize returns they crave.
In a conversation at the Economic Club of New York, Lawrence Summers, a former Treasury secretary, and Glenn Hubbard, a former chair of the Council of Economic Advisers, expressed concern. Mr. Summers, who served in Democratic presidential administrations, has repeatedly voiced his worry that the combination of current monetary and fiscal policy will spur unwanted inflation — a worry affirmed by this month’s Consumer Price Index report. “Future financial historians will be mystified by why we were spending $50 billion a month buying mortgage-backed securities in the face of a housing price explosion,” he said. Mr. Hubbard, a former Republican official, said he did not “see an argument” for the Fed’s current approach “without telling the public what an exit path is going to be.”
So far, that exit path has not materialized. When asked in March if the Fed was “talking about talking about” ending Q.E., Mr. Powell said, “Not yet.” The next month, he reiterated that the time had not come. That sounds like a man facing pressure to maintain the status quo.
Of course, there’s a counterargument: that concerns about wild inflation are overblown and that it will take time to rebalance supply and demand equations after much of the world economy was shut down for more than a year. But that’s no rationale for again expanding the Q.E. program.
At some point, the years of excess in the financial markets will likely lead to a volcanic economic disruption. Capital markets will seize up, and debt and equity financing will be largely unavailable. Years of economic pain and turmoil will follow, with the worst of it, as ever, borne by those least able to handle its consequences. Just as in the aftermath of 2008, the blame will be diffuse.
But there are alternatives. Brian Deese, the director of the National Economic Council, should encourage President Biden to urge Mr. Powell to begin tapering the Fed’s bond-buying program and to keep doing it even after the markets have their tantrum. Ron Wyden, the chair of the Senate Finance Committee, could invite the survivors of the 2008 financial crisis to remind us how close we all came to the abyss last time. The Fed could make the decision to change direction on Q.E. at the Federal Open Market Committee meetings this week.
If not, we’ll scratch our heads in collective amazement that we again find ourselves in the midst of a financial crisis — a thoroughly avoidable one.
William Cohan, a former investment banker, is a founding partner of Puck, a new media platform, and the author of several books about Wall Street.
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