The bond bubble debate

BoyRacer · March 21, 2010, 5:06pm

Low Interest Rates Pump Up Asset Prices -> pbs.org/nbr/site/onair/trans … ts_100316/

SUSIE GHARIB: The Federal Reserve said today that the economy is improving, but not fast enough to change its interest rate policy. Jeff, policymakers decided to keep the Fed’s key interest rate at 0 percent.

JEFF YASTINE: Susie, there was one policymaker voting against that decision: Tom Hoenig, president of the Kansas City Federal Reserve Bank. For the second meeting in a row, he dissented, saying there are risks to the economy by keeping interest rates so low for so long.

GHARIB: Jeff, interest rates have been at zero since December of 2008. Well, the Fed gets blamed for creating so-called bubbles by keeping interest rates super low. Here is why. Low rates make the cost of money cheap. That encourages excessive risk taking, which drives up active prices, creating bubbles. We saw the damage to the economy when that happened in the housing market. Now there are worries about it happening in the bond market. Suzanne Pratt takes a look at the bond bubble debate and why investors should pay attention to it.

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