Federal Reserve: Interest Rate Hike Could Spark Depression

Federal Reserve to Raise Interest Rates

I have held the contention that the key to the solution to the economic debacle is that interest rates need to be raised. If the president and his cabinet and Ben Bernanke and his ilk wish to stabilize housing prices and keep them artificially high then the only way to do this is to raise interest rates. Less people will buy, thereby keeping the prices high. I think the fed sees the writing on the wall.

“The Federal Reserve may start to raise its target interest rate from near zero in the first half of 2010 as the economy recovers, Princeton University economist Alan Blinder said.”

Keep in mind, a lowered interest rate is what cause the housing bubble to ferment and take hold. They started raising rates in June, 2004. It was a quarter point increase, from 1 to 1.25. Two years later, the Fed funds rate was up to 5.25. By that time the housing bubble was already on solid foundation. This was of course completely reversed last year, to the point that in December it was at zero, switching to asset purchases and credit programs as the main policy tools.

“I think the Federal Reserve will look around at the state of the financial system and the state of the economy” and “bump the federal funds rate above zero,” Blinder, who served as Fed vice chairman from 1994 to 1996, said in a Bloomberg Television interview. “I am not talking about a massive tightening,” he added.

San Francisco Fed President Janet Yellen said last month leaving the rate at zero for several years is “not outside the realm of possibility.” Some Fed officials, including Richmond Fed President Jeffrey Lacker, have warned that leaving rates too low for too long could spark inflationary pressures.

“A forecast for the fed funds rate to remain near zero for years is a “very dire” outlook,” Blinder said.

According to Bloomberg, Fed Chairman Ben S. Bernanke is leading plans to buy as much as $1.25 trillion of mortgage-backed securities and $200 billion of federal agency debt by year end, and $300 billion of long-term Treasuries by September. Some economists have called on him to explain how the central bank can withdraw stimulus without causing inflation.

Exit Talk ‘Premature’

“Too much talk about an exit strategy now is premature,” Blinder said. “It is not close to pulling the trigger. Things are looking better, but everything is still looking a little fragile.”

While Blinder predicted a first-half 2010 rate increase, the median forecast of economists surveyed by Bloomberg News is for the Fed to raise rates starting in the third quarter of 2010.

Fed officials projected the U.S. unemployment rate may climb as high as 10 percent and judged the economy at risk to further shocks, according to minutes of their June 23-24 meeting released today. Employers in the U.S. cut 467,000 jobs in June, pushing the unemployment rate to the highest in almost 26 years, the Labor Department reported July 2.

“Frankly, 9.5 percent unemployment is a just terrible labor market, the likes of which we haven’t seen since the early 1980s,” Blinder said, adding that economic slack will dampen inflation. Just to point out, around the country Nevada has a 12% unemployment rate and Michigan has a 15% unemployment rate. This is not even counting the exasperated unemployed, those who have given up. Those number all show above 20% unemployment.

The committee appears to have a “substantial disagreement” over the likelihood of a surge in inflation as the economy recovers, he added.

Bernanke Reappointment

Blinder said that there are “still pretty good” odds that Bernanke, a former Princeton professor, would be reappointed as chairman of the Federal Reserve , “all predicated on the B of A thing not blowing up in his face.”

Bernanke’s role in persuading Bank of America Corp. to complete its takeover of Merrill Lynch & Co. has been scrutinized by Congress. The issue is a “distraction,” Blinder said.

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Ex law school student. I was kicked out for revealing I had a heart actually beating inside. I used to be in a modern dance company. I'm working on my 7 miracles to be proclaimed a saint by the pope. #1 is really hard, but once i get over that hump the other 6 will be a cinch.

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