Tags: America's Forum | Jeremy Grantham | Federal Reserve | interest rates | economic recovery

Jeremy Grantham: Fed's Antics Are Killing Economic Recovery

By    |   Monday, 24 March 2014 12:43 PM

The Federal Reserve's low interest-rate policy is crushing the recovery, argues, Jeremy Grantham, the co-founder of money management firm GMO.

There's no evidence that quantitative easing (QE) has helped the economy or increased capital spending, Grantham told Fortune.

While "there's some indication" that the crash would have been worse without the Fed's intervention, the economy would have soon rebounded without it.

Editor’s Note: 38 Trades That Could Turn $1,000 Into $49,000

"Higher interest rates would have increased the wealth of savers," he says. "Instead, they became collateral damage of [previous Fed Chairman Ben] Bernanke's policies."

While it has increased stock prices, the Fed has created a bubble that will collapse when it withdraws QE, he says. "The Fed gives them very cheap leverage on the upside, and then bails them out on the downside. And you should have more confidence of that now."

Stocks will continue going higher because the Fed "hasn't ended its game," he said, predicting the Fed will continue that game until the S&P rises another 25 percent, reaching 2,350.

The Fed's of intervention and bailouts during the financial crisis also hurt.

In previous financial crisis, the Fed did not intervene yet the economy bounced back, Grantham says.

"The Bernanke put — the market belief that if anything goes bad the Fed will come to the rescue — has had a profound impact on people and how they act."

Large balance sheets that the Fed and other central banks have accumulated lead to a crash that "will be unlike any other," he predicts.

"Assets are overpriced generally. They will be cheap again. That's how we will pay for this. It's going to be very painful for investors."

Fortune Senior Editor Stephen Gandel was skeptical about Grantham's argument that low rates hurt the economy.

"To someone who believes in the laws of economics, it's hard to overstate how odd that claim is. It's positively bonkers."

Still, the recovery has been weak despite sustained low interest rates. "So, either Grantham is bonkers, or he is onto something."

While Fed bashing remains common among financial professionals, predictions of the Fed's critics have turned out to be incorrect, notes The New York Times. It's policies have not led to high inflation or debase the dollar.

Despite pervasive criticism, many financial industry leaders generally support the Fed's decisions, saying its interventions and low rates helped prevent a financial collapse and depression.

"The Fed has been doing what it can to stabilize this inherently unstable system, but we are still left with the system," Tony Crescenzi, a portfolio manager at Pimco, told the Times.

Editor’s Note: 38 Trades That Could Turn $1,000 Into $49,000

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The Federal Reserve's low interest-rate policy is crushing the recovery, argues, Jeremy Grantham, the co-founder of money management firm GMO.
Jeremy Grantham,Federal Reserve,interest rates,economic recovery
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2014-43-24
Monday, 24 March 2014 12:43 PM
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