The Federal Reserve has offered explicit forward guidance on the path of interest rates. Rates will be near zero for the foreseeable future, and for some time after that, as the Fed will keep rates low even after inflation rises above two percent. How much extra inflation the Fed will tolerate is unclear, which adds some uncertainty in the medium term. The Fed also plans to buy mortgage backed securities and more Treasuries. This intervention may have been justifiable in the spring when those markets were under extreme turmoil, but its value going forward and the risk of distortions and financial instability are concerns.
Allison Schrager is a senior fellow at the Manhattan Institute, author of An Economist Walks Into a Brothel (Random House), and a co-founder of LifeCycle Finance Partners, LLC, a risk advisory firm. Follow her on Twitter here.
Photo by Mark Makela/Getty Images