Letter: US central bank adds to foam and leverage


Sebastian Mallaby’s assurance (“Regarding inflation, how strong does the Fed have?”, May 8 report) that we can count on the Federal Reserve not to lie down strangely corresponds to the current passivity of this institution to meet the two major challenges it is now facing.

At a time when President Joe Biden’s record peacetime fiscal stimulus threatens to cause economic overheating and inflation by year-end, Fed Chairman Jay Powell keeps repeating that the Fed “Don’t even think about raising interest rates”.

Equally disturbing, at a time when the Fed’s own financial stability report warns of the risks in financial markets associated with foamy asset markets and excessive hedge fund leverage, current policies the Fed seem to add to this foam and this leverage.

They do this by keeping interest rates extremely low and continuing to buy $ 120 billion in US Treasury bonds and mortgage-backed securities each month.

The Fed’s current reluctance to raise interest rates increases the chances that later this year it will be forced to put the brakes on monetary policy to meet its inflation target.

This in turn risks bursting the current bubbles in the equity and housing markets which are based on the mistaken assumption that current low interest rates can last forever and that the Fed will be slow to start scaling back its buying program. of bonds.

Desmond Lachman
American Enterprise Institute
Washington, DC, United States

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