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Barron's Front Page: It's Time to Raise Rates, Ben

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Barron's just published an excellent commentary about how the Federal Reserve should start implementing an "exit strategy". According to the article:
With the crisis clearly past, the Fed ought to boost short-term rates to a more normal 2% - still low by historical standards - to send a signal to the markets that the U.S. is serious about supporting its beleaguered currency and that the worst is over for the global economy. Years of low short rates helped create the housing bubble, and the Fed risks fostering another financial bubble with its current policies.

Like the Washington Post commentary that I described in this Wednesday post, the Barron's article also mentions the harm being done to savers:
It's also time for the Fed to consider the plight of the country's savers, who now are getting less than 1% yields on money market funds and who are being forced to take substantial interest-rate or credit risk if they want higher yields. "The Fed is punishing prudent people and rewarding profligate people," one veteran investor tells Barron's.

It's nice to see yet another media article mention the harm that the current policies have on prudent savers while reckless behavior is being rewarded.

The article is realistic about the near-term chances of a rate hike by the Fed. It's very unlikely:
Our view unquestionably is an outlier. With unemployment near 10%, few see a need for higher rates. And Fed chairman Ben Bernanke, while acknowledging that the Fed will need to pursue an "exit strategy" and tighten monetary policy, clearly wants to act later rather than sooner.

As this Calculated Risk blog post described, a rate hike before 2011 is unlikely based on unemployment and the Fed's history in past recessions. Hopefully, this Barron's commentary will spark more review of the economic strategy which will lead the Fed to act before high inflation and new bubbles are created.

Thanks to the reader who emailed me the link to this article.

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Comments
13 comments.
Comment #1 by Anonymous posted on
Anonymous
Feds and Congress and Obama are still rewarding bad behavior by the banks. Obama wants to give help to small banks, community banks, mid cap banks and other institutions who still behave badly and are refusing to originate new loans.
Bernanke is under control from the wall street and is no longer relevant as an independent body.
Treasury are busy printing money like there is no tomorrow.
Congress is asleep and busy with stupid health care bill that nobody needs or wants.
Pellosi is brainwashing the reps and threatening and blackmailing into voting what ever is in her irrelevant addenda.
The banks receive as much money as they want for free or 0% interest loans.
We, the people who pay for all of that are ignored and in-slaved for generations to come and on the hook for all that debt, trillions and trillions and counting up by the minute.
Dollar is trashed by the rest of the world and we are fighting for a miserable 2% interest rate CDs.
Can not get any worst for the people or can it?

1
Comment #2 by Anonymous posted on
Anonymous
Nicely said Anonymous, at 1:22 PM, October 23, 2009, you hit the nail right on the head.

1
Comment #3 by Anonymous posted on
Anonymous
.


>> We, the people who pay for
>> all of that are ignored


Aha ... I see some more whining ...

Well ... so what are you - the people - going to do about it, other than writing on this blog? Anything revolutionary at all? No?



>> It's also time for the Fed to
>> consider the plight of the
>> country's savers,

Err ... No!

FED is not in the business of considering the so called plight of the so called country's savers.

The mandate given to the FED by us (i.e. we the people) does not cover plight consideration! :-)


>> It's nice to see yet another
>> media article mention the harm
>> that the current policies have
>> on prudent savers while
>> reckless behavior is being
>> rewarded.

Current policies? ... Nah.

The current-policies are merely trying to contain/overcome the outcome of the past-policies which decreased the oversight / relaxed the standards/regulations causing the reckless behavior.

Nope ... there is no reward offered here ... it is just that the FEDs, Politicians, SEC, FDIC/NCUA now have their back against the wall and they are fighting hard to correct the mistakes that were made in the past.


.

1
Comment #4 by Anonymous posted on
Anonymous
Why not think about one's strategy realistically vs. arguing/debating issues beyond one's control??

1
Comment #5 by Anonymous posted on
Anonymous
The Fed should try a small increase in rate and see what happens. At this point, the recession is being perpetuated in no small part by public perceptions and fear. And everyone scrutinizes the Fed's actions. So a small increase in rate would be seen as confidence that things are getting better. They could always reverse that action at their next meeting or sooner, as we have seen them do.

Besides, are low rates really helping? It seems that most of the positive news we see has been related to stimulus programs (Cash for Clunkers and the first-time home buyer credit). The banks still have a death grip on the taxpayer funds they were so generously loaned. There does not seem to be any thawing in that area.

1
Comment #6 by Anonymous posted on
Anonymous
Breaking News-
FDIC closed three(3) banks in
southwest Florida:
Flagship National, Partners Bank and Hillcrest Bank.

1
Comment #7 by Anonymous posted on
Anonymous
To Anonymous, at 3:32 PM, October 23, 2009.
Your cynical criticism is not what we expect from educated person like you.
How about telling us your point of view or anything we can learn from you, instead of repeating some paragraphs and then nullifying those personal thoughts expressed by the people.
You are not commenting, you are mucking and pretending to be above us.
Show us what you really know about this subject. Positive or negative it is not important, it is what you really thing we should do or not to do, is what it counts.

1
Comment #10 by Anonymous posted on
Anonymous
.


>> The Fed should try a small
>> increase in rate and see what
>> happens.

Try? Oh ... so you recommend experimenting with nations economy!



>> At this point, the recession is
>> being perpetuated in no small
>> part by public perceptions and
>> fear.

Will the small rate-increase change the public perception about recession and decrease the fear?

Public's needs can be summed up in one word - money. Majority chooses to earn this need by means of job, therefore what will satisfy this simple need is creation of more jobs. Low rate environment creates a supply of (nearly) free money for the big corporations and mid/small-size businesses that can create the much needed jobs. Govt also can and has created many of these jobs.



>> And everyone scrutinizes the
>> Fed's actions. So a small
>> increase in rate would be seen
>> as confidence that things are
>> getting better.

Really? ... So a common citizen who wants to do a job but is unable to find one will suddenly start feeling confident because of small rate increase when at the same time the big corporations and small-mid-size businesses will lose their supply of (nearly) free money which is a contributing factor in job-creation?



>> They could always reverse that
>> action at their next meeting or
>> sooner, as we have seen them do.

Sure ... try this ... if it does not work, try something else! Oh my ... are we talking about some recipe or are we talking about nation's economy? ( Needless to say if FEDs were to do this sort of flip-flop, then many more critics such as yourself will come out of wood-work and flood the blogs with criticism. )



>> Besides, are low rates really
>> helping? It seems that most of
>> the positive news we see has
>> been related to stimulus
>> programs (Cash for Clunkers and
>> the first-time home buyer
>> credit).


Obviously ... It is simpler to report the news about clunker owners from Mass to Washington going to dealerships than finding those small-mid sized businesses that have added jobs as a result of low-rates and reporting that as a big news.



>> The banks still have a death
>> grip on the taxpayer funds they
>> were so generously loaned.
>> There does not seem to be any
>> thawing in that area.

Err ... I don't think so. And if that is so, then tell us what are the tax payers going to do about it? Any chance of nationalizing Citi or Bank Of America? ( Perhaps President Chavez might be able to give a few pointers to President Obama about nationalization. )


.

1
Comment #11 by Anonymous posted on
Anonymous
Aw, Snippy (Anon at 8:18 AM, Oct. 24), back again and still so miserable and rude, and nobody can make you happy. Why don't you go away and let the rest of us have some polite, constructive discourse?

Yep, raising rates would be experimental. But so is just about everything the government is trying because we are in uncharted waters. If you have given something your best shot and it is not working, you try something else. The Fed Fund Rate has been at 0%-0.25% (even lower than it was after the dotcom bubble burst) for about 10 months now. But banks are not loaning to businesses. The new jobs will not come until businesses have the wherewithal to hire people. Unemployment is still rising. If nothing is done to promote lending, I think the only solution will be more programs that bypass the obstructionist banks and directly get money out to the people and businesses.

As for the Fed's actions being influential, you betcha! Stock market indices usually show a pronounced rise or fall after Fed meetings in which rates are changed. And yes, much of the public believes what the popular press tells them and adjusts their spending accordingly. So if the popular press tells them the government is feeling more positive and they can relax a bit, that will help. Granted, a small bump up in the rate will not immediately help the unemployed person, but it may well encourage employed people and investors and banks, and the trickle-down effect could ultimately be a thawing of credit and creation of jobs.

1
Comment #12 by Anonymous posted on
Anonymous
To Anonymous, at 8:18 AM, October 24, 2009.

See post relevant to your posting by poster at 8:25 PM, October 23, 2009.

I would add the following: You are not constructive poster nor you have the ability to post any opinion of your own without attacking someone else. Therefore, we will ignore your posts.

1
Comment #13 by Anonymous posted on
Anonymous
The previous two posts are Right on the Mark. Both of them!

1