Look for the Fed to keep rates low for a long time

By Money Matters Editors

U.S. Federal Reserve Chairman Ben Bernanke is not raising short-term interest rates Wednesday, and he’s not for several quarters.

And it’s not just because the Fed needs to stimulate the U.S. economy: there’s a new fad making the rounds in Washington – it’s called ‘scapegoat the Fed.’

The fad appears every 20 years or so when lawmakers want to blame someone or something for the nation’s economic woes: why not blame the Fed.

One faction of Congress – a terribly misinformed one at that – has blamed primarily the Fed for the housing bubble, subsequent bust, and the financial crisis. The Fed and other government agencies forced banks to lend to poor/working poor people that banks would not normally lend to, and that caused mortgages to go bad – triggering the financial crisis.

The above argument strains credulity! If lending to poor people was the error, why then are commercial real estate management companies and private realty firms failing as the mortgages on their malls, shopping centers, and offices complexes fail? Did the Fed or government agencies also force banks to lend the hundreds of billions of dollars in mortgages to these commercial real estate operations? Did poor/working poor people default on these mortgages too? Hardly, which is why one shouldn’t take the faction that blames the Fed for the financial crisis too seriously.

Further, this same faction in Congress, largely conservative, wants to audit the Fed. That would substantially restrict the Fed’s independence and the amendment/bill advocating such must be voted down.

However, although, the Fed is independent, it does not operate in a political vacuum. Bernanke senses the mood on Capitol Hill and he will keep rates lower for a slightly longer time because of it. Less-certain is the impact of the political climate on quantitative easing.

But even with the polarizing, divisive mood on Capitol Hill, investors should know that Bernanke will still be guided by the metrics that matter concerning monetary policy: the unemployment rate and inflation. Provided inflation remains low, Bernanke will have the time to help the nation reduce its very high 10% unemployment by keep interest rates low through the end of 2010. If inflation accelerates, the Fed will move to increase rates sooner.