Bernanke sticks to low rates.... risky... but understandable

These days I watched and listened the first press conference by Ben Bernanke, in which he elaborated on the US-FOMC monetary policy. After a nervous start, he started getting the hang of it when it all became 'technical'. Whereas Trichet is a fully certified clueless-empty-can-but-very-capable-regent who brushes off all complicated questions with a number of standard mantras, Bernanke was in good shape. The guy very obviously knows what he is talking about and that is a huge relief in comparison to Trichet. I noticed that in general, also the US-FED-watchers shared the view that this was a good first premiere by Bernanke (see also here).

Wat Bernanke told us, is that the FOMC, with its double mandate on price stability and employment, chose to prioritize the economic growth and employment by maintaining low interest rates for the time being. The quantitative easing will end in June, but there will be reinvestments of matured bonds. The Fed considers a stop on this reinvesting as a tightening of monetary policy and will only do so after due consideration and on the basis of an explicit FOMC decision. So, for now, we will face a prolongued period (at least three months) of low interest rates in the US. Employment is the main thing.

The market effects were quickly visible with a happy stock market and a diving dollar. Meanwhile I was pondering the thought if the economy in the US would really be in such a bad shape that it deserved further easy-money? Or could there be another angle at all this?

I realised that we are in the run up to new elections and recalled literature from a while ago: research by the FED that observed a correlation between the behaviour of the FED/FOMC and the pre-election year. This would be either an explicit or implicit case of the principal-agent situation. Meaning that in the year before the elections, the US Presidents appreciates a solid economy which then creates jobs that he can show off with in the election year. And from that perspective, the FED-decision is quite clear (and a case in point).

Still, this is playing with fire, as we are in the same situation that brought us the financial crisis: a prolongued perod with low interest rates, which may seduce markets into taking too much risk. Which may lead to the situation where we get rid of the hangover by taking a new beer, the day after (as we all know, the recipe for die-hard alcoholism). En also our central bank (De Nederlandsche Bank NV) states a serious warning in its financial stability report which does not sound happy at all:
Just as in the run-up to the crisis, we can observe overliquidity in the worldwide financial system, with global imbalances. These developments may, in the medium term, threathen the financial stability, when once again bubbles in financial markets or unsustainable debts will come into being. We have almost stretched the accomodative monetary policies that we see worldwide, to their maximum limits.

In sum, the historic days are not over yet. As we are very much aware how we came into this crisis, it remains a risky approach to stick to low interest rate policies. Time will tell.