By: Dr. Lynn Reaser
While barring a last minute compromise, Congress appears to send us “over the cliff” with $85 billion of automatic spending cuts, the Federal Reserve continues to try to push the economy forward. Federal Reserve Board Chairman, Ben Bernanke, has been on Capitol Hill this week explaining the Fed’s policies and its intention to continue to hold interest rates down.
The risks of easy money are now beginning to outweigh the benefits. In order to maintain low interest rates across the board, the Fed is buying $85 billion of mortgage-backed securities and Treasuries each month with newly created money. At this pace, the Fed’s balance sheet will swell by $1.0 trillion this year to $4 trillion by year-end. This policy could lead to either an asset price bubble (junk bonds, farmland prices, etc.) or higher inflation down the road.
Ultra-low interest rates are doing little to relieve the uncertainty weighing on businesses and consumers that is holding back growth. The Fed’s continued pursuit of its present course could push off yet another cliff.
Image Credit: Mallin, Jay. Federal Reserve. Digital image. The New York Times. Bloomberg News, 12 Dec. 2012. Web.