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Rate Hikes Imminent, Like It or Not

By Sean Hyman   |   Monday, 11 Jan 2010 02:41 PM

U.S. home loan rates could rise quickly as the Fed wraps up its $1.25 trillion support program of buying mortgage-back securities, warned a top Fed member over the weekend.

"You maybe would have thought you would have seen rates move up more quickly than they have, but nonetheless it's a concern," Boston Federal Reserve Bank President Eric Rosengren told The Hartford Courant.

Rates have danced around just under 5 percent for months, largely on the Fed’s insistence that it will stay in the game.

But, now it says support will dry up in March.

Rosengren now says the Fed is unlikely to extend the program, since it no longer is forecasting imminent economic collapse.

"Until inflation gets back to 2 percent there is plenty of room to wait and see how the economy progresses," Rosengren told the newspaper.

"We want a trajectory that gets us back to full employment and gets us back to 2 percent."

Problem is, he acts like there's plenty of time before inflation gets to 2 percent. But it's at 1.8 percent now on the latest year-over-year consumer price index (CPI) inflation readings.

If we get a second very high reading, then the Fed will have to seriously consider hikes. That's why they are warning the banks to get ready for it now.

Regulators on Thursday urged banks to protect themselves against pending hikes in interest rates.

Until now, they have been borrowing money from the Fed for nearly zero and lending it out cheap — easy money that could quickly come to an end.

It was all part of the government plan to support backs through the worst of the credit crunch, and thus support the larger economy.

If the Fed thinks that support is no longer needed, rates will have to rise.

If the year-over-year CPI hits 3 percent then it’s all but guaranteed that they will start hiking rates and most likely, fairly aggressively at that time.

We are in stagflation right now: negative GDP growth, yet recovering, plus and high and rising inflation and high unemployment.

The way you generally have to solve this is twofold. In other words, it takes the government doing two jobs at once.

On one hand, they have to stimulate the economy to attack the sluggish growth part of the equation. However, at the same time, they have to fight inflation by hiking interest rates.

If they don't do both things well, rate hikes will crush the economy.

If they stimulate without eventual rate hikes, then inflation goes out of control even further.

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U.S. home loan rates could rise quickly as the Fed wraps up its $1.25 trillion support program of buying mortgage-back securities, warned a top Fed member over the weekend. You maybe would have thought you would have seen rates move up more quickly than they have, but...
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