Tags: Feldstein | Fed | interest | rate

Feldstein: Fed Policy 'Driving' Lenders, Investors to Take Excessive Risk

By Dan Weil   |   Monday, 25 Aug 2014 02:09 PM

Harvard economist Martin Feldstein, chairman of President Reagan's Council of Economic Advisers, has been arguing for at least two years that the Federal Reserve has gone too far in its easing program.

He's not backing down now. Fed policy is creating too much risk in the financial system, Feldstein tells CNBC. "Very low interest rates are driving lenders into taking risks, low-quality loans [and] investors into buying junk bonds with low spreads."

The central bank has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008. Its balance sheet has mushroomed to $4.4 trillion through quantitative easing.

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There's "good reason to think interest rates are too low," Feldstein notes. He's concerned that inflationary forces are strengthening. Consumer prices rose 2 percent in the 12 months through July.

For the rest of the year, he believes economic growth will be 3 percent.

It appears that a growing number of economists are coming to agree with Feldstein's view of the Fed.

A new survey of 257 members of the National Association for Business Economics shows that 53 percent believe monetary policy is on the right track, down from 57 percent in February 2014 and August 2013, while 39 percent think Fed policy is too stimulative.

A total of 41 percent of the respondents think the Fed will raise its fed funds target in the first half of 2015, and 34 percent see it happening in the second half of 2015. But 31 percent would like to see an increase by the end of this year.

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