We’ve had easy money since 2005. It got us into this housing mess. We’ve kept the Fed policy of easy money to try to get us out of the housing mess. The surge in the stock market is a direct result of easy money.
Soon, the party must end and interest rates must head up.
Fed leaders continue to say that interest rates must stay low.
Yet once the recovery is firmly entrenched, Fed policymakers will need to raise rates to keep inflation in check. Before they do, they first will want to signal that credit will soon be tightened. The trick is doing so without jolting investors and borrowers, who would face higher rates on certain credit cards, some mortgages and other loans.
How best to telegraph the approach of higher rates is likely to dominate discussions when Bernanke and his colleagues meet Tuesday. In particular, the Fed will decide whether to keep, or water down, its year-long pledge to keep rates at “exceptionally low” levels for an “extended period.” Economists generally think “extended period” means at least six more months.