Tags: James Grant | Federal Reserve | inflation | price

James Grant: Fed Has 'Overmedicated' the Patient

By    |   Thursday, 05 Jun 2014 01:12 PM

The Federal Reserve has gone way too far in its massive stimulus program, says James Grant, editor of Grant's Interest Rate Observer.

"First and foremost the patient is overmedicated — that is, the economic patient," Grant said in an interview with Forbes Media Chairman Steve Forbes.

"[With] stimulus by the bottleful, by the prescription-fill, gradually (and I guess not so gradually), the Federal Reserve has moved to substitute price administration for price discovery," he noted.

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While the Fed has curbed its monthly bond purchases to $45 billion from $85 billion last year, its balance sheet has grown to $4.3 trillion. And the central bank has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

"It seems the Fed's full-court press on financial markets and pricing thereof has induced a deep complacency with respect to financial assets and has also introduced a sharp degree of optimism or what we might call even inflation in the financial markets."

That, of course, can cause trouble. For example, "there certainly is a great distortion in the pricing of junk bonds," Grant stated.

"There has been a succession of interventions since 2007. And they accumulate to immense, improbable, unimaginable amounts of digitized, immaterial money. And they also have given us immense kind of incentives to invest and speculate in new and arguably riskier ways."

Fed officials themselves are worried about complacency in financial markets. "Volatility in the markets is unusually low," William Dudley, president of the New York Fed, said after a speech last week, according to The Wall Street Journal.

"I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they'll take more risk than really what's appropriate."

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The Federal Reserve has gone way too far in its massive stimulus program, says James Grant, editor of Grant's Interest Rate Observer.
James Grant, Federal Reserve, inflation, price
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2014-12-05
Thursday, 05 Jun 2014 01:12 PM
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