WASHINGTON — A debate is raging among investors and analysts: Has the Federal Reserve inflated a stock market bubble by driving interest rates to record lows?
The answer, according to economists surveyed by The Associated Press: No.
Three-quarters of the economists say stocks, which are at their lowest point in a month but are up 19 percent since November, aren't overvalued. Many point to strong corporate profits as justifying the surge in stock prices, which have more than doubled since bottoming in 2009.
The economists expect many consumers to respond to their increased stock wealth by spending more in coming months. Higher spending would help sustain and perhaps accelerate growth.
The economists think growth is slowing to around a 2 percent annual rate in the April-June quarter from a 2.4 percent rate last quarter. The key reasons: Federal spending cuts, higher taxes and economic weakness in Europe and elsewhere.
But they say U.S. economic growth should increase in the second half of this year and speed up next year. Besides the stock market gains, steady job growth and surging home prices will likely fuel more spending.
They forecast that growth will reach 2.8 percent in 2014 as hiring accelerates and consumer confidence — now at a five-year high — improves further. If they're accurate, that would be the fastest growth since 2005. "A bubble is an extreme thing, when the market loses all contact with reality," says Bill Cheney, chief economist at John Hancock Financial Services. "I don't think we're near anything like that."
Most of the nearly three dozen economists surveyed by the AP say the Fed's policies have helped boost stock prices. The Fed has been buying $85 billion in bonds each month to try to keep loan costs at record lows and encourage borrowing and spending. The super-low rates have led some investors to shift money out of low-yielding bonds and savings accounts and into stocks, thereby boosting stock prices.
In recent weeks, stock and bond investors have been rattled by speculation that the Fed will start to scale back its bond purchases later this year. Investors have pushed up long-term rates. Once the Fed acts, rates could rise further. Some investors would sell stocks and buy higher-yielding bonds. Stock prices could fall.
For now, broad measures of stock prices remain in line with historic norms, given the strength of company profits, the economists say.