Tags: lawrence lindsey | federal reserve | punch bowl | bubble

Lawrence Lindsey: Fed Must 'Take Away the Punch Bowl' and Hike Rates

By    |   Monday, 08 June 2015 02:30 PM

Former Federal Reserve Gov. Lawrence Lindsey urges the Federal Reserve to “take away the punch bowl” and begin raising rates.

He told CNBC that if the central bank doesn’t start raising rates, potential problems will only mount.

"Risks are necessarily two-sided, and by delaying action, what that'll mean is when they have to move, they're going to have to move much more quickly,” he said. “And to me, that's a much more destabilizing type of risk than a gradual adjustment upward in rates," the Lindsey Group CEO said.

Many economists expect the Federal Reserve to soon start raising interest rates for the first time since 2006.

But the Fed has said it will raise rates only once it sees further improvement in the labor market, and is reasonably confident that inflation is headed back to the Fed's 2-percent target. However, with growth in the first-half of the year likely to run below the economy's potential of about 2 percent growth, the timing of a rate hike is unclear.

Policymakers have kept interest rates near zero since December 2008, and most have long thought they would be able to begin to lift rates this year. Even after the economy's dismal first-quarter performance, policymakers stuck to that view, attributing the slowdown to the effects of a severe winter, and predicting a snapback.

"The question is how do we get to a higher Fed funds rate? The question is do we do it slowly and start sooner, or do we wait until we're forced to do it by the bond market or by events or statistics?" he asked.

He said that the United States is now contending with its third financial bubble, after the dotcom and housing bubbles of the late '90s and mid-2000s.

"It's a lot of fun while the bubble is going up, and no one wants be accused of ending the party," he said. "But as William McChesney Martin said, it was the job of the Fed — it is the job of the Fed — to take away the punch bowl before the party really gets going."

But not every expert predicts a Fed rate hike. In fact, some are calling for quite the opposite.

Gloom, Boom & Doom Report Editor and Publisher Marc Faber cautions investors not to worry about just when the Federal Reserve will begin hiking interest rates.

In fact, another quite different fate awaits investors – the central bank will have to launch yet another round of quantitative easing.

“Yes, I think so,” Faber told CNBC when he was asked about even more central bank stimulus.

“Not only the U.S. Fed, but all the central banks are so deep in the mud that, in my view, they will continue to essentially buy assets.”

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Former Federal Reserve Gov. Lawrence Lindsey urges the Federal Reserve to "take away the punch bowl" and begin raising rates.
lawrence lindsey, federal reserve, punch bowl, bubble
Monday, 08 June 2015 02:30 PM
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