The Federal Reserve’s unconventional monetary policy has pumped up asset prices by suppressing interest rates and has misallocated capital. It’s time to end the mispricing of assets and let markets determine rates without interference from the Fed. Waiting to normalize monetary policy will further inflate asset bubbles and make the ultimate normalization of rates more costly.

The Fed has not increased its benchmark short-term interest rate since 2006 and has held the Fed funds target rate near zero since 2008. More important, there has been little interest in reducing the size of the Fed’s massive balance sheet by selling off longer-term Treasuries and mortgage-backed securities, because doing so would sharply depress bloated asset prices as interest rates returned to more normal levels.
Quantitative easing (i.e., the large-scale purchases of longer-term government debt and mortgage-backed securities) was designed to lower interest rates and incentivize investors to reach for yield by taking on more risky assets (e.g., stocks, junk bonds and real estate). Meanwhile, near-zero rates on money market funds and savings have severely penalized more conservative investors.