Tags: Whalen | Federal | Reserve | Rates

Tangent Capital's Whalen: Federal Reserve Should Let Interest Rates Rise

Monday, 16 July 2012 11:09 AM

The Federal Reserve has taken many steps to best ensure interest rates stay low, from cutting benchmark lending rates to near zero to more unorthodox measures such as bond buybacks from banks, which pump liquidity into the financial system. Now it's time to start letting interest rates rise, says Christopher Whalen, Senior Managing Director of Tangent Capital Partners in New York.

Investors are avoiding short-term credit markets since they don't return well amid times of low interest rates, and increased demand there would help the broader economy.

"Well I think the Fed needs to let rates go up a little bit so we can rebuild the short-term credit markets. They're coming back a little but we have to make it worthwhile for investors to hold cash and short-term assets," Whalen tells CNBC.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Streamlining regulations would help the economy as well.

"There are a lot of structural things, maybe revisit Dodd-Frank in certain respects, the regulation of the real estate sector again is not going to help us," Whalen says, referring to the Dodd-Frank financial overhaul law that increased oversight on the financial sector in wake of the housing bust and economic meltdown.

"And we still have a lot of restructuring to go in the commercial real estate sector but the market is going to take care of that. We don't need help from Uncle Sam. He needs to get out of the way more."

Since the downturn, the Fed has rolled out two rounds of bond buybacks from banks, a tool known as quantitative easing, injecting $2.3 trillion into the economy in the process with the aim of steering the country away from deflationary decline while creating conditions ripe for investing and hiring.

The U.S. central bank has also rolled out a $400 billion program that shuffles its Treasury holdings, known as Operation Twist, later expanding it by another $267 billion.

Under Operation Twist, the Fed purchases longer-duration Treasury securities in the market while selling an equal amount of shorter-duration Treasury securities with the aim of keeping interest rates low.

Weak monthly jobs reports and other poor economic indicators are fueling talk the Federal Reserve will intervene in the economy again with a third round of quantitative easing to steer the economy away from deflationary decline and back to growth and hiring.

Some Fed officials say another round of easing may be necessary to jolt the economy.

"I have been watching the economic data and listening to what people tell us about what's going on in the economy with increasing concern," says Atlanta Fed President Dennis Lockhart, according to Reuters.

"And in that sense, my receptivity has increased a bit."

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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