The Bloomberg report on Minneapolis Fed president Gary Stern’s hawkish views noted that he has a more sanguine view of the health of the financial system than other FOMC members do.
The Federal Reserve shouldn’t wait until financial and housing markets stabilize to raise interest rates, central bank policy maker Gary Stern said.
“We can’t wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course,” Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview today. “Our actions will affect the economy in the future, not at the moment.”
The comments by Stern, a voter on the rate-setting Federal Open Market Committee this year, reinforced traders’ forecasts for a rate increase by year-end. Stern indicated that Treasury Secretary Henry Paulson’s rescue plan for Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump.
I’m not sure I buy that logic. Making it clear to Congress that guarantees to housing have a real economic cost, which is what the rescue does, may constrain their efforts to launch more housing initiatives. The rescue of Fannie and Freddie do not improve the fundamentals of the housing market.
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Traders’ estimates of a rate increase in October rose to 64 percent after Stern’s remarks were published, from 58 percent earlier today….
“This is a very challenging policy environment,” Stern said today. “I don’t think we ought to pretend that” an end to the credit crisis “won’t take some time,” he said.