(January 7 – 16:10 ET) – Who’s to blame for the market bubble of late 1999? The
U.S. Federal Reserve Board. Or, so says a special online edition of the venerable Grant’s Interest Rate Observer.
Grant’s argues that in stockpiling for Y2K – the disaster that wasn’t – the Fed boosted the market by creating vast quantities of credit. Over 1999 the Fed ’s balance sheet expanded at a 19.7% annual rate, says Grant’s. In effect, it pushed US$100 billion of fresh credit into the market, fuelling expansion.
In boosting the money supply the Fed boosted credit throughout the system and spurred the very expansion it is simultaneously trying to quell, says the Observer. Now that money will be bled back out. Unless the market cools things with a prolonged correction, higher interest rates are seen as the inevitable solution, says Grant’s.