Lawrence Lindsey, former fed governor says yes.
Market Watch: WASHINGTON (MarketWatch) — The Federal Reserve risks another bond
market tantrum if it continues to hold off on a rate hike, a former U.S.
central banker said Tuesday.
Lawrence Lindsey, who served at the
Fed in the 1990s before joining the George W. Bush White House, said
the central bank had delayed normalization of rates “way beyond what is
prudent.”
“You would have been laughed out of the classroom” in graduate school
if you proposed holding rates at zero with the unemployment rate at
5.4%, as the Fed is doing now, Lindsey said during a panel discussion on
Fed policy at an event sponsored by the Peterson Foundation.
“At
some point we’re going to get a series of bad numbers, showing a little
higher inflation and the market is going to say ‘on my god, we’re so
far behind the curve’ and force an adjustment that is going to be
wrenching,” Lindsey said.
He predicted that the market disruption would be a “seven or eight” on a scale of 10, which 10 being the worst.
This risk could be mitigated if the Fed made some modest hikes now, he said.
The
“taper tantrum” in the bond market occurred in the summer of 2013 when
then-Fed Chairman Ben Bernanke switched gears and hinted for the first
time of the eventual end of the third round of bond purchases, commonly
known as QE3. After the comments, bond prices fell and yields spiked.
The housing market arguably suffered the most as mortgage rates moved
higher and potential buyers pulled back.
Lindsey said the Fed “has almost no credibility” with his clients about its ability to “stay on top of ticking monetary bomb.”
Maybe, but raising interest on deposits reduces the remits back to Treasury, and all of treasury debt costs rise. Bernanke's favorite member bank could freeze up. So before raising the deposit rate, make sure Congress is well educated on the issue.
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