Investors can rest easy, monetary policy to stay loose!

US Federal Reserve

In his testimony to the Senate Banking Committee on Tuesday, U.S. Federal Reserve Chairman Ben Bernanke gave the green light for risk assets to push higher, with his defence of the Fed’s highly accommodative monetary policy. Bernanke reiterated the benefits of low interest rates and their large-scale asset purchase program for the economic recovery.

While noting the risk to financial stability from holding rates low for a considerable time – “for example portfolio managers dissatisfied with low returns may “reach for yield” by taking on more credit risk, duration risk, or leverage” – the chairman said that some risk-taking – “such as when an entrepreneur takes out a loan to start a new business or an existing firm expands capacity – is a necessary element of a healthy economic recovery”.

For investors in risk assets who have benefited from loose monetary policy there is no reason to fear a change in policy in the short term. Or even the long term, if the real economy fails to return to a sustainable growth path with lower unemployment, assuming inflation expectations remain in check.

In the words of the most powerful central banker – “We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation”.

Enjoy this blog? Please spread the word :)