Will it end badly?

Date posted: February 11, 2013

The Federal Reserve has created a lot of money and kept interest rates very low, in order to support and stimulate the economy. But some worry about the downsides of these actions. Are there any? N.C. State University economist Mike Walden responds.

“Well, the two big concerns … (are), number one, inflation. History shows that when a central bank like the Federal Reserve creates a lot of money, eventually that money will show up in terms of higher inflation. We’ve not seen that yet, but some worry about that down the road.

“The other concern is investment bubbles. And you can go back to the early 2000s. The Federal Reserve was also printing a lot of money. Some say that money went into the housing market, created the housing investment bubble, and then we had the crash and, of course, the recession.

“Now the Federal Reserve is well aware of these risks. And they do need, however, I think, to think about – and I think they already are – about when will it be appropriate for them to reduce their support of the economy, which essentially would mean raising interest rates and pulling back some of that money they created. That will be a very, very, very difficult task for that kind of exit strategy. And some people worry that it’s not going to end well – that when the Federal Reserve begins to do that, we’re going to have maybe a particular investment market collapse or interest rates shoot up and that will kill off the economic recovery.

“Some actually … argue that we have precedent for this, because the Federal Reserve began to unwind right before the housing crash. Some argue that by the Federal Reserve raising interest rates right before the housing crash and pulling back money, that eventually led to the downside of that part of the economy. So, big, big task ahead for the Federal Reserve.”

 

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