Tags: Warsh | markets | Fed | inflation

Former Fed Gov. Warsh: Markets 'Absolutely Spoiled by Federal Reserve'

By    |   Wednesday, 01 April 2015 06:00 AM

You can add former Federal Reserve Governor Ken Warsh to the list of those who think financial markets have grown too dependent on monetary stimulus from the Fed.

"Markets began this absolutely spoiled by the Federal Reserve. The Fed has been spoiling financial markets since the depths of the financial crisis," he tells CNBC.

"The Fed talks, markets move up. That's been great. Now I will say markets are exhausted. They're exhausted that the Fed has decided there's a new set of benchmarks."

The central bank has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008, and its balance sheet has ballooned to $4.5 trillion through quantitative easing.

And what about the argument that the Fed can't raise interest rates because inflation is too low?

"I don't buy it," says Warsh, now a distinguished visiting fellow at the Hoover Institution. "The truth is by inflation measures including the measures created and controlled by the Federal Reserve, inflation is around 1.5 percent [excluding food and energy]."

The Fed has an inflation target of 2 percent. "What's the difference to the economy if inflation were at 2 percent versus 1.5 percent? Not much," he argues.

Many economists expect the Fed to begin increasing rates in September.

Meanwhile, Warsh's colleague at the Fed, former chairman Ben Bernanke, writes in his new blog that the central bank's low-interest rate policy isn't what has hurt savers.

"The state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors," says Bernanke, now a distinguished fellow in residence at the Brookings Institution.

"The Fed influences market rates but not in an unconstrained way. If it seeks a healthy economy, then it must try to push market rates toward levels consistent with the underlying equilibrium rate."

He notes that some congressmen accused him of throwing senior citizens who are dependent on savings under the bus.

"I was concerned about those seniors as well," Bernanke explains. "But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do."

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You can add former Federal Reserve Governor Ken Warsh to the list of those who think financial markets have grown too dependent on monetary stimulus from the Fed.
Warsh, markets, Fed, inflation
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2015-00-01
Wednesday, 01 April 2015 06:00 AM
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