Tags: Grant | Fed | easing | stock

James Grant: Fed's Massive Easing Will Cause Major Stock Drop

Tuesday, 25 Feb 2014 09:58 AM

By Dan Weil

The Federal Reserve's accommodative policy has artificially boosted stocks, but will ultimately bring them down in a major way, says James Grant, editor of Grant's Interest Rate Observer.

"My fear is that interest rates are suppressed, therefore earnings are inflated," he tells CNBC. "So when rates go up, . . . the hall of mirrors is shattered, and we look at each other and see what actually is real rather than what the Fed wants us to believe."

The Fed's federal funds rate target stands at a record low of zero to 0.25 percent. And the central bank's balance sheet has bulged to more than $4 trillion from its quantitative easing during the past six years.

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Grant says the Fed should have stayed out of the 2008 financial crisis, so that markets and wages could have freely sunk to their natural lows.

"What happens in a capitalist economy when there is not intervention?" he asks. "Prices get low enough to invite buyers to come in and seize that value."

The Fed's easing hasn't helped the economy, Grant argues. "We have been living through a very persuasive demonstration of futility of intervention to solve a recession."

As for the Fed in 2008, transcripts of its meetings from then, released last week, show Fed policymakers underestimated the economy's weakness early in the financial crisis.

On Sept. 16, the day after Lehman Brothers filed for bankruptcy, the Fed unanimously voted against cutting interest rates.

St. Louis Fed President James Bullard said at the time that the central bank should "wait for some time to assess the impact of the Lehman bankruptcy filing, if any, on the national economy," The New York Times reports.

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