Please Do A Surprise 50bp Rate Hike!

Though it seems counter intuitive, the best thing the Fed can do for the health of the American economy right now would be to announce an immediate inter-meeting 50bp rate hike, perhaps after telegraphing it for a few days first.  The immediate effect would be to inflict massive losses in oil and other commodity speculation by shoring up the dollar and to let the world know that the Fed is as serious about inflation as the ECB. This would put a floor under the stock market here and allow any contemplated fiscal stimulus to stimulate new economic activity rather than simply being sent abroad to oil producers.

The counterarguments are 3.

1 – this would potentially spook credit markets

2 –  this might raise the cost of mortgage refinancing which is the original source of the worlds problems in the first place and make the housing decline worse (actually the cause of this was the Fed holding real Fed Funds negative for too long after 9/11,  sound familiar?),  and

3 – a higher dollar would hurt exports which are the healthy part of the economy and is helping to bring down the current account deficit.

Objection 1 can be solved by carefully telegraphing the move and elucidating the rationale before hand.  Objection 2 is somewhat real.   But the likely effect would be to bring LIBOR and FED FUNDS more into line and to flatten the yield curve so the effect would be muted.  It would also help shore up employment thus keeping more income streams available to service mortgages.  Objection 3 is true but there is a strong argument that a current account deficit is the sign of a strong economy, is not unsustainable and is therefore desirable.

Net net, raising rates would reduce the tax that is the oil and commodity spike and on balance would contribute more to satisfying the Fed’s twin mandates of maximizing employment and minimizing inflation than would the current course of policy.

One Response to “Please Do A Surprise 50bp Rate Hike!”

  1. bangpath » Blog Archive » UPDATE: Please Do A Surprise 50bp Rate Hike! Says:

    […] is an additional argument I did not mention in the post below of June 6th for the Fed to keep rates unchanged as they did yesterday.  That argument is that banks, many of […]