Federal Reserve Chairman Ben BernankeEvan Vucci
There is growing sentiment that the U.S. Federal Reserve needs to switch tracks and boost short-term lending rates.
Although the world's most powerful central bank has made it clear it has no intention of tightening monetary policy in the near term, any shift in that strategy would hit stock markets around the globe.
The most recent call for Fed chairman Ben Bernanke to raise the key federal funds rate from near zero comes in the form of a cover story in the influential financial weekly Barron's.
"With the crisis clearly past, the Fed ought to boost short-term rates to a more normal 2 per cent - still low by historical standards - to send a signal to the markets that the U.S. is serious about supporting its beleaguered currency and that the worst is over for the global economy," the magazine wrote this week in a piece entitled "C'mon, Ben!"
"Years of low short rates helped create the housing bubble, and the Fed risks fostering another financial bubble with its current policies."
The Fed also needs to scale back its massive bond purchases, which are forcing down interest rates on mortgages and treasury bills, creating an artificial boom in housing and punishing prudent savers, concluded the author, Andrew Bary.
He argues that with the consumer price index on track to reach 2 per cent this year, compared with a 1.3 per cent decline over the last 12 months, inflation has already returned. Moving interest rates up to either 1 per cent or 2 per cent would "shock global markets," but would nip inflation in the bud, burst the next bubble in the making and show the rest of the world that the U.S. is serious about supporting its currency, he said.
Other voices supporting a rate hike include economist Ed Yardeni, a former head of economics and strategy at Deutsche Bank who now runs his own research firm in New York. He says the Fed is giving too much weight to a measure called the resource utilization rate (RUR), which is a combination of the capacity utilization rate and the employment rate. RUR is a business cycle variable, and "the consequences of monetary policy driven single-mindedly by the business cycle is an asset bubble cycle," he said in a note Wednesday.
Mr. Yardeni said he agrees with the Barron's call, but added he doesn't see the Fed moving any time soon.
Dennis Gartman, the popular U.S. market commentator who has been outspoken against the White House's willingness to let the dollar slide, said the world's monetary authorities, beginning this week in Canada, are ganging up on the U.S. dollar to try to make it stronger against their own currencies. Canada and Europe, for example, worry that their strong currencies will crimp their own economic recoveries by reducing exports.
On Tuesday, the Bank of Canada left rates unchanged at 0.25 per cent and expressed concerns about the recovery, cutting 2009 and 2011 growth and inflation forecasts. It also warned the strength of the Canadian dollar could "more than fully offset" recent improvements seen in the Canadian economy.
In two weeks, the G-20 finance ministers and central bankers are due to meet in Scotland for an economic summit, during which Mr. Gartman expects members could take "real action" against the greenback, although it's still unclear what those steps would involve, he wrote in his daily news letter Wednesday.
Barron's warned the United States is being short-sighted if it continues to antagonize other countries by keepings its interest rates and currency low. The falling dollar has added to the losses of overseas investors in the U.S. stock market. Europeans, for example, have seen holdings hammered by 50 per cent.
"If the U.S. wants to continue to attract overseas capital, it's going to need to support its currency," Mr. Bary wrote. "If a resilient U.S. economy can't tolerate 1 per cent or 2 per cent short rates, this country really is in bad shape."