Tags: fed | Bernanke | towel | Economy

CNNMoney: Bernanke Has Thrown in Towel on Economy

By    |   Monday, 15 Aug 2011 07:59 AM

Federal Reserve Chairman Ben Bernanke is throwing in the towel on the economy, writes Paul R. La Monica in his CNNMoney column.

The Federal Reserve's announcement that it plans to keep interest rates low for the next two years is equivalent to waving the white flag of surrender. The announcement shows that the Fed believes economic recovery will remain slow.

Get ready for a Japanese-style lost decade, La Monica advises. By keeping rates low, the Fed guarantees low long-term bond rates like Japan experienced. Ten-year Treasury yields could approach 1 percent.

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Fed Chairman Ben Bernanke
(Getty Images photo)
"That would be extremely troubling," he writes. "The time to emulate Japan's economy was in the 1980s. Not now."

Telling the markets its plan was a mistake, La Monica says. The Fed has boxed itself in. Although the economy will probably not improve dramatically quickly, the market and the Fed have been wrong before.

If the economy does recover, the Fed will prompt another panic if it raises rates because it has promised to keep rates at rock-bottom levels until 2013.

Even a small rate increase will damage the Fed's credibility.

"The Fed should react when it's necessary, not when the calendar tells it is OK to do so," he writes.

Continually low rates weakens the dollar and risks causing inflation, La Monica asserts, pointing to earlier inflation in commodity prices. The risk of inflation is why the Fed will probably avoid QE3, a third round of quantitative easing.

Instead of worrying about calming the markets, the Fed should concentrate on encouraging employment and fighting inflation, its two official mandates, La Monica argues.

In setting an interest rate timetable, Bernanke is following the example of the Bank of Canada, which had some success influencing longer-term rates with a similar pledge to keep rates two years ago, according to a Bloomberg article.

In its press release, the Fed said it anticipates that economic conditions, including the inflation outlook, "are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

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Federal Reserve Chairman Ben Bernanke is throwing in the towel on the economy, writes Paul R. La Monica in his CNNMoney column. The Federal Reserve's announcement that it plans to keep interest rates low for the next two years is equivalent to waving the white flag of...
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Monday, 15 Aug 2011 07:59 AM
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