Fed Policies Aren’t Distorting Asset Prices

Fed Governor Lael Brainard.

Photographer: Mark Kauzlarich/Bloomberg

The Federal Reserve’s low interest rate policy and quantitative easing have distorted financial markets. At least, that appears to be the conventional wisdom on Wall Street, eagerly embraced at the very top of the industry to serve as the basis for investing decisions.

But what if this hypothesis is incorrect? Then the conventional wisdom becomes pernicious and generates nothing but costly investment mistakes.

This notion is rooted in the idea that higher rates in the past were “normal” while current rates are “unnaturally” low. These abnormally low rates are to blame for what are seen as abnormally higher asset valuations, which is why the Fed is described as distorting financial markets.