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Low Interest Rates or a Better Economy, Which Do You Prefer?

As the economy continues slow but steady progress, government should step back and let it go on its way.

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In this holiday-shortened week, markets continued to fixate on news out of the Federal Reserve. Last week the markets rallied based on a Ben Bernanke speech suggesting that the economy was not out of the woods yet and that some type of monetary easing remained on the table if things worsened, according to the concluding paragraphs of a lengthy speech. This week, markets collapsed on the release of the minutes from the Federal Reserve Open Market Committee, suggesting the economy was stronger than the Fed had anticipated. The Fed stuck to its language of low rates until 2014, but there certainly were no hints that more quantitative easing was just around the corner.

Interestingly, the minutes released this week were from three weeks ago and predate Bernanke's speech of early last week. In any case, the market seems deathly afraid of any tightening and the higher interest rates that such a policy engenders. As an economist, I would much prefer a stronger economy to yet another government program. Somewhere, in this cycle, we just have to break the attitude that we require the government to save us. We just need them to stand out of the way so we can save ourselves.

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Robert Johnson, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.