Fed’s quixotic plan to raise interest rates to the moon once inflation starts

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Fed’s quixotic plan to raise interest rates to the moon once inflation starts

Tuesday, September 29th, 2009 | Economics |

AP - Officials: Fed will need to boost rates quickly:

To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the economy is back on firmer footing, Fed officials warned Tuesday.

“I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity” to when the Fed was slashing rates to battle the recession and the financial crisis, said Richard Fisher, president of the Federal Reserve Bank of Dallas.

Color me skeptical. What they’re saying is that once the economy begins turning around and inflation begins they’re going to be willing and able to drastically raise interest rates. Consider what that means:

Businesses that depend on revolving credit lines or short-term financing may be unable to borrow the money they need, forcing them into bankruptcy.
Homeowners with adjustable rate mortgages will see their rates shoot to the moon, forcing millions of homeowners into foreclosure.
Students will see their student loan rates skyrocket, keeping many out of college.
Consumers struggling with credit card debt will see their interest rates rise.

Hiking interest rates is incredibly painful. It takes tremendous political will to do it. It also takes certainty that raising rates won’t kill a nascent recovery.

Too, all of this assumes that inflation can only happen after a recovery starts. That isn’t true at all. We could have stagflation - a stagnant economy combined with high inflation.

Tags: mortgage mess, the fed