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Morici: Fed Policies Have Caused Economic Distortions

By    |   Friday, 18 December 2015 11:00 AM

Newsmax Finance Insider Peter Morici, economist and business professor at the University of Maryland, told Newsmax TV that the Federal Reserve's first rate hike in nearly a decade comes after the central bank's tactics caused "distortions" in the economy.

The Fed on Wednesday lifted its key interest rate by a quarter point to a range of 0.25 to 0.5 percent, up from near zero for the first time since December 2008.

The central bank was forced to make a move now "because low interest rates were imposing distortions," he told "Newsmax Now."

"Borrowing money at near 0 interest rates doesn't do the economy a whole lot of good. It was creating some bubbles in real estate in really high-end markets like New York and San Francisco. The feeling is that these kinds of distortions we no longer can afford them and we can afford higher interest rates to get rid of them," he said.

But the average consumer shouldn't worry about their daily finances, at least not just yet.

"Near term, the impact is not large. For example, the rate hike probably means each car payment per month will go up by about $4. But mortgage rates will hardly go up at all," he said.

"Largely it'll affect short-term consumer loans and short-term business loans. It'll make them tougher to get and a tad more expensive. Longer term, though, these rate increases will mount one after another. I mean the plan is to raise it 1 percent next year, 1 percent the following year in small steps so that after a while instead of it being $4 per month on a car loan it'll be something like $36," he said.

Meanwhile, the debate is on just how this rate hike will  affect job growth and stock prices.
"I don't think it's going to affect either jobs growth or stock prices very much. The economy's going to generate about 200,000 jobs a year," he said.

"These interest rate changes are not consequential enough to adversely affect jobs growth. Even if we go all the way up to, say, 2 percent. Likewise, stock prices have been strong with interest rates of 4 or 5 percent historically. So this modest increase is nothing to really worry about," he explained.
(Newsmax wire services contributed to this report).

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1

To read more from Morici, CLICK HERE NOW.

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The Fed hiked rates because low interest rates were imposing distortions. There was successive barring in areas like the junk bond sector or businesses borrowing money at near 0 interest rates to buy back shares.
fed, rate hike, economy, investors
Friday, 18 December 2015 11:00 AM
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