The Federal Reserve's rate tactics during recent years have created a toxic environment for investors and stocks, and a "day of reckoning" looms, former Rep. Ron Paul, R-Texas, has warned.
The Nasdaq composite hit its record high of 5,132.95 on Thursday after getting a boost from the Federal Reserve on Wednesday. Policymakers signaled that they were in no hurry to raise interest rates from historically low levels.
The Fed suggested it wanted to see more improvement in the economy and signs of inflation before raising rates. The low rates have helped drive the bull market in stocks.
"I am utterly amazed at how the Federal Reserve can play havoc with the market," Paul recently told CNBC.
"I look at it as being very unstable."
Many experts think the central bank will raise its key short-term rate at some point this year. That rate has been held near zero since 2008. Many analysts predict that if the economy keeps improving, the Fed will raise rates in September.
Paul said the central bank’s "fallacy of economic planning" has created such a "horrendous bubble" in the bond market that it's only a matter of time before it pops. And when it does, it will lead to "stock market chaos."
Friday, U.S. government bond prices rose. The yield on the 10-year Treasury note, which falls when prices rise, dropped to 2.26 percent from 2.32 percent late Thursday.
As far as when the bubble will burst, the former Republican presidential candidate said, "I don't think there's any way to know what the [timeline] is, but after 35 years of a gigantic bull market in bonds, [the Fed] cannot reverse history and they cannot print money forever."
However, John Tamny, political economy editor at Forbes, doesn't believe the Federal Reserve's massive easing program laid the foundation for the stock market's surge that has seen the S&P 500 index triple over the past six years.
To give the Fed credit for the rally, "we’d have to believe that central bankers have suddenly figured out how to engineer bull markets," he writes.
The Fed has kept short-term interest rates at a record low since December 2008 and expanded its balance sheet to $4.5 trillion through quantitative easing.
"Not asked enough is why the Fed’s [stimulus] would excite investors in the first place," Tamny says. "Quantitative easing has logically been anti-market for it revealing unfortunate overreach whereby the Fed acts as capital allocator over information-pregnant markets themselves."
So what is responsible for stocks' ascent?
"The gridlock that’s prevailed in Washington since early 2012 seems a more likely driver of optimism for it somewhat removing government as a risk to future returns," Tamny maintains.
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