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Thank You, Ben Bernanke

My wife and I bought our first house in November, and the interest rate on my mortgage is even lower than the national average of 3.32 percent. Rates are approaching their lowest levels since 1971.

Thank you, Ben Bernanke.

My low interest rate is just one example of the real world impact of the Federal Reserve’s actions. And yet it’s easy to fall into “Fed fatigue.” Last week’s announcement from the Federal Open Market Committee seemed to receive relatively little media attention, and I wonder if many laypeople agree with Brian Wesbury, the chief economist at First Trust Advisors, who wished “the Fed would literally at this point just go away.”

Federal Reserve Chairman Ben Bernanke has made it clear that neither he nor the Fed will go away any time soon. And while they’re here, their choices will continue to have a direct effect on consumers’ everyday lives, even if that effect isn’t always easy to see. The media and the public would do well to keep paying attention.

Bernanke is a student of the Great Depression, and he has no desire to repeat the mistakes of that era. During the Depression, central bankers not only failed to provide stimulus to the economy, they took active steps (such as raising interest rates) that plunged the country further into depression and lengthened the crisis’ duration.

Bernanke has long made it clear he has no intention of pulling back this way. After all, he isn’t nicknamed “Helicopter Ben” for nothing; his philosophy has been, and remains, that throwing cash at the economy will keep things moving. Stephen Oliner, a former senior adviser at the Fed Board in Washington, told Bloomberg that Bernanke “is really on guard” against criticisms that “he had done too little.”

It doesn’t seem that this is a criticism he needs to worry about hearing. In last week’s press release, the Fed announced that it would continue purchasing mortgage-backed securities at a rate of $40 billion per month, and that it would purchase longer-term Treasury securities at an initial pace of $45 billion per month. These actions, while further inflating the Fed’s already enlarged balance sheet, are designed to keep interest rates down and, in the agency’s own words, “help make broader financial conditions more accommodative.”

The press release also announced a change that got the larger share of the media coverage. Instead of maintaining a policy of near-zero interest rates until a calendar date - the Fed previously said it would maintain them until 2015 - the Fed gave itself flexibility to begin increasing rates sooner if unemployment falls to 6.5 percent or less, provided that inflation is not projected to rise above 2.5 percent. The change simply clarifies what most people suspected; if conditions change for the better sooner than expected, we can anticipate a policy change as a result.

While these metrics are slightly less arbitrary than a date, they are still flawed. After all, 6.5 percent unemployment does not account for those who stop looking for work. And inflation measures such as CPI or core inflation have also shown that they are not always reliable. Yet by pegging their actions to an external measurement, rather than to time, Bernanke and the Fed are pledging that they won’t withdraw stimulus until the job is done.

Make no mistake. Just because we haven’t yet seen increasing inflation doesn’t mean we won’t. Bernanke has judged that moderate inflation will be less damaging to the economy than extended unemployment. I believe he is continuing to do what he thinks is right and that he is comfortable with the consequences, whether they are intended or unintended.

Bernanke has a brutal, thankless job. Alan Greenspan, his predecessor, was lauded and revered before the financial crisis hit; now his reputation is a shambles. In an opinion piece for The Atlantic, Zachary Karabell wrote “[Central] Bankers may be stewards, but they are doing a lousy job convincing people of it.” Bernanke has been second-guessed for years, and will continue to be as long as he holds his position. It may take years or decades to truly determine whether he made the right calls. But in the meantime, his decisions will continue to create collateral damage.

The real question is whether the benefits of Bernanke’s decisions will outweigh the costs. Not only will interest rates continue to stay low, but assets with values in fixed dollar terms, such as a bond or a bank account, will be worth less and less as the coming inflation starts to become more apparent. Investments with values that increase over time, such as stocks, commodities or real estate, will be the way to maintain and grow one’s wealth. In effect, the Fed will make your stuff worth more and your dollars worth less.

Just because Bernanke has spent years taking action, and plans to keep acting, doesn’t mean his actions have become meaningless through repetition. We should pay attention to news like last week’s because it will shape our lives for years to come. We may feel like we’re watching reruns, but it does matter.

Vice President and Chief Investment Officer Paul Jacobs, of our Atlanta office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 12, “Retirement Plans;” Chapter 15, “Investment Approaches and Philosophy;” and Chapter 19, “A Second Act: Starting a New Venture.”

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