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Life Health > Life Insurance > Term Insurance

Bernanke: Low Rates Are the Long-Term Trend

By Bernice Napach

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Former Federal Reserve Chairman Ben Bernanke suggests that despite expectations of rising rates, low interest rates are here to stay for a while.

“Low interest rates are not a short-term aberration, but part of a long-term trend,” writes Bernanke in his new blog hosted by the Brookings Institution, for which he is a distinguished fellow in residence for the Economic Studies Program.

He explains that “real interest rates [adjusted for inflation] are determined by a wide range of economic factors, including prospects for economic growth — not by the Fed.”

The Fed influences market rates by controlling the money supply, which sets the Fed’s short-term rate, and that has remained between zero and 0.25% for more than six years.

Bernanke writes that the Fed’s best strategy is “to set short-term rates at a level consistent with the healthy operation of the economy over the medium term,” which he terms the “equilibrium real interest rate.”  In technical terms it’s the interest rate, minus inflation, that’s “consistent with full employment of labor and capital resources,” writes Bernanke.

If the Fed keeps rates too high relative to the equilibrium rate, the economy would slow, writes Bernanke. If it pushes rates too low, the economy would grow so fast that inflation would rise.

In response to critics arguing that the Bernanke Fed kept rates too low for too long, Bernanke writes that a rate hike in a weak, but recovering, economy would have likely led to another economic slowdown and lower returns on capital investments, and the Fed would be forced to cut rates again, as other central banks have had to do.

To critics who have accused the Fed of distorting financial markets by keeping rates “artificially low,” Bernanke writes that “there’s there is absolutely nothing artificial” about a Fed policy aimed at maintaining rates that are consistent with a healthy economy.

Janet Yellen, the current Fed chairwoman, seems to have echoed Bernanke’s sentiment when she said recently that “the equilibrium real federal funds rate is … anticipated to rise only gradually over time as the various headwinds that have restrained the economic recovery continue to abate.”

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