Marketplace March 17, 2004
The Fed won't raise interest rates, despite the possibility of asset bubblespopping all over the place.
Alan Greenspan and the Fed came in for a lot of criticism after thestock-market imploded in 2000. For years he had warned investors againstirrational exuberance. But he didn't raise interest rates enough to prickthat bubble before it got to be a giant balloon just waiting to pop.
Is history about to repeat itself? With interest rates so low, money hasbeen rushing into assets like shares of stock and real estate. Over the past12 months, the stock market has experienced its biggest gain in 50 years, ifyou adjust share prices for inflation. And just last quarter, home pricesrose at the fastest pace in a quarter century.
The low interest rates are also feeding what appears to be a consumerbubble. Household debt increased last year at its quickest rate in twodecades, as consumers borrowed against these soaring values of their homesand stock portfolios. If all these bubbles keep expanding, and then burst,the sound will be heard around the world.
So does this mean the Fed should now be raising interest rates enough toprick these bubbles? Some think so. The venerable Economist Magazine isurging that the Fed raise interest rates. But that would be a mistake. I don't even believe the Fed blew it in not preventing the great technologybubble of 2000.
The Fed's job is not to stop people from speculating. If they want togamble, that's their business. The Fed's job is to avoid inflation on theupside. And on the downside it's to energize the economy when - as now -lots of people are still unemployed or underemployed.
So my message to the Fed: Keep those interest rates down until the economyis back on track.
