WALL STREET – As interest rates begin to rise, the danger intensifies that the current stock-market bubble could burst with disastrous consequences to retirement savers with 401(k) and IRA accounts.

The Federal Reserve Open Market Committee in its first meeting under incoming chairwoman Janet Yellen decided to continue “pumping money” into the economy at a strong level.

The policy, known as “quantitative easing,” has been continued with a reduction of only $10 billion a month from the $85 billion maintained by former chairman Ben Bernanke.

The probability of the stock-market bubble bursting will increase if interest rates continue to rise as the Fed maintains QE at a level of $75 billion a month. The scenario suggests the Fed has lost the ability to contain interest rates by adjusting monetary policy.

The notes of the last Federal Reserve Open Market Committee policy meeting, Dec. 17-18, 2013, were released to the public Wednesday. They indicated some of the 10 voting policymakers are worried about “an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the committee was likely to withdraw policy accommodation more quickly than had been anticipated.”

The language was crafted to reassure investors nervous about rising interest rates that the Fed was going to try to steer a difficult-to-maneuver, cautious path in which QE would remain aggressive despite concerns of FOMC policymakers that a perceived “economic recovery” threatened rising interest rates.

Those concerns appeared justified this week when the U.S. Treasury set out to sell $30 billion of three-year securities at the lowest level of market demand perceived since last October, pushing the yield of the 10-year note lower for a second day in a row.

With interest rates and price in bonds historically demonstrating an inverse relationship – when interest rates rise, bond yields typically decrease – deterioration in U.S. Treasury yields will signal caution to savvy investors.

The minutes of the FOMC meeting released this week have led Wall Street to anticipate the Federal Reserve will continuing a policy of “tapering” QE by reducing it an additional $10 billion a month at the next FOMC meeting scheduled for Jan. 28-29, with the expectation the Fed will stop buying U.S. debt altogether in December 2014.

As Wall Street anticipates interest rates rising in the near future, a speech by Federal Reserve Bank of Boston President Eric Rosengren is drawing widespread attention.

Rosengren, who just finished a year’s service on the FOMC, was a vocal supporter of the Fed’s QE policy of keeping interest rates at or near zero. He was the sole dissenter in his last vote as a member of the FOMC in December 2013, opposing the decision recommended by outgoing Fed chairman Ben Bernanke that the Fed should begin reducing its purchases of U.S. government-issued debt in the near future.

Worried that QE tapering was almost certain to give momentum to rising interest rates, Rosengren’s carefully worded speech still managed to convey his concern that ending QE too rapidly could cause an interest-rate spike, resulting in increased interest costs. In a chain reaction, increased interest expense could bring the cost of making interest payments on the federal debt to levels that could tank the economy.

For instance, if interest rates were to rise, as many economic experts anticipate – with yields on the three-month treasury rising to approximately 4 percent by 2018 and 10-year Treasuries to approximately 5.2 percent – interest payments on the federal debt will increase to $505 billion in 2018 from the current level of $255 billion.

By comparison, the still rancorous sequester only cut government expenses by some $85.3 billion in the first year.

Greenspan and ‘Goldilocks’

In particular, Rosengren, in his speech to the American Economic Association’s annual meeting in Philadelphia Jan. 4, reminded his audience of the sensitivity of housing prices to rising interest rates in 2007, the period just prior to the bursting of the housing-market bubble.

“In 2007, the Boston Fed’s Regional and Community Outreach staff documented how foreclosures were disproportionately impacting low-and moderate-income neighborhoods around New England,” he said. “Families experiencing a ‘life event’ such as an unemployment spell, a divorce, or health issues in a rising housing market can sell their house. However, those same problems occurring during a period of falling housing prices often resulted in foreclosure.”

In his attempt to continue the economic expansion of the 1990s while restraining inflation, then-Federal Reserve chairman Alan Greenspan attempted, beginning in May 2004, to allow interest rates to rise “just right,” hence “Goldilocks,” to sustain balanced economic growth without inflation.

Unfortunately, Greenspan’s modest interest-rate increases were enough to tank a then runaway subprime mortgage market in which the fall in housing prices resulting from high monthly mortgage-payment prices caused a raft of foreclosures that hit low- and moderate-income homeowners, causing the mortgage market to crash in 2008.

After Sept. 11, Greenspan and the Federal Reserve began cutting interest rates aggressively in an effort to jump-start a badly shocked U.S. economy back into robust activity.

“For a full year-and-a-half after September 11, 2001, we were in limbo,” Greenspan wrote in his 2007 book, “The Age of Turbulence: Adventures in a New World.” “The economy managed to expand, but its growth was uncertain and weak. Businesses and investors felt besieged.”

Greenspan is open about his policy during this time.

“The Fed’s response to all this uncertainty was to maintain our program of aggressively lowering short-term interest rates,” he wrote.

Under Greenspan’s direction, the FOMC extended a series of seven cuts made in early 2001 to lower the fed funds rates down to around 1.25 percent by the end of 2002, a figure Greenspan admits “most of us would have considered unfathomably low a decade before.”

Greenspan admitted the Fed was aware that maintaining these low interest rates “might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address.” But he claimed the Fed was worried the economic slowdown after Sept. 11 might cause deflation, a concern of professional economists around the world after experiencing the deflation that plagued the Great Depression of the 1930s.

As 2007 came to a close, Greenspan was a hero on Wall Street.

Investors who had made billions of dollars hailed Greenspan’s low-interest policy as the key to engineering an unprecedented surge of wealth on Wall Street.

At the close of 2007, those warning that the economy had peaked and the real-estate bubble had already burst were dismissed as prophets of doom whose ill tidings risked spoiling the party.

As 2008 began, pundits were predicting the Dow would climb past 15,000 without much difficulty.

Unfortunately, such optimism was unfounded, as Greenspan and the Fed managed the federal funds rate up from a low of 1 percent in May 2004 to a plateau of 5 percent maintained for a year. From the last quarter of 2006 until approximately the last quarter of 2007, Greenspan and the Fed began lowering rates in fear the upward adjustment violated the Goldilocks rule in being “too much” instead of “just right.”

In December 2007, few realized that month would later be regarded as the official start of the most severe economic downturn in the U.S. since the Great Depression of the 1930s.

Rosengren’s fear was that the decision of the Fed to begin tapering QE could trigger a rise in interest rates that would cause a repeat of the mistake the Fed made under Greenspan, this time causing the stock-market bubble to burst.

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