In an interview on Wednesday with The Daily Ticker, Bair, now a senior advisor to the Pew Charitable Trusts, specifically said that the low interest rate strategy promoted by the Fed to goose the economy is “backfiring.”
“The Fed has got the best of intentions…but it’s counterintuitive,” she told the website. “Low rates dampen the incentives to invest.”
The Fed’s monetary policies have made it more difficult for banks to generate revenue, forcing them to seek profits in other ways, she noted.
“It’s very difficult to make a loan of a multiyear duration because you have this very low interest rate on your balance sheet,” Bair said. “That’s not good for business lending. Banks can make money in other ways—trading profits, investment banking fees, deposit accounts—other ways…that don’t necessarily help the economy.”
Business lending, not home refinancing, holds the key to the economic recovery, according to Bair. The U.S. needs to shift its economic priorities if a full recovery is to happen, Bair added.