Is the Fed going to raise rates?

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No! The Fed is not crazy. Market participants are forgetting that the U.S. economy is still not out of the woods. Moreover, many financial institutions are drowning in writedowns. None of this should be expected to change anytime soon. Yet, the market now expects the Fed to actually raise rates. Yes, inflation is rising, but the Fed knows deflation from credit contraction and financial panic is still the biggest threat to sustained long-term growth in the U.S.

God help them if they do raise rates, because the outcry on main street would be swift, vocal and negative.

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Caroline Baum has written a commentary on the Fed raising rates that I highly recommend. She says:

“The Fed is independent, yes; it’s not immune to political realities. After facilitating and financing the purchase of Bear Stearns Cos. by JPMorgan Chase & Co. in March, how would members of Congress react to a rate increase at a time when their constituents are struggling to buy food and gas for their families?

Bernanke is certain to be reminded of the Fed’s dual mandate — maximum sustainable employment and price stability — when he testifies before the Senate Banking and House Financial Services committees in July.

Maybe that’s why, as Kasriel’s Northern Trust colleague, Asha Bangalore, points out, the Fed has never raised the federal funds rate until after the unemployment rate starts falling.

The Fed is in no position to raise interest rates. The U.S. economy is in or close to recession. Americans are losing their jobs, their homes, their wealth and their confidence.”
Caroline Baum, Bloomberg News, 13 Jun 2008

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For Caroline Baum’s column, see my blogroll on the sidebar.

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