Fed’s Debate on Future Rates Draws Interest at Jindal School Event
Bob McTeer (left), former president of the Federal Reserve Bank of Dallas, and John Mauldin, an economist and best-selling author, said it's time for the Federal Reserve to raise short-term interest rates. Both spoke at a recent program at the Naveen Jindal School of Management.
Financial experts said the Federal Reserve, after nearly a decade of unprecedented monetary stimulus, should raise short-term interest rates sooner rather than later during a program held recently at the Naveen Jindal School of Management at UT Dallas.
“The Fed has kept rates too low for too long. I think they should go ahead and move rates up,” economist and best-selling author John Mauldin said. “The Fed needs to give itself some room to stimulate when the economy turns down again. As it stands now, their only weapons are to take interest rates negative or to resume quantitative easing.”
Mauldin and Bob McTeer, former president of the Federal Reserve Bank of Dallas, spoke to an audience of about 100 on Sept. 9 at “Greece, China and the Federal Reserve: What could possibly go wrong?”, co-sponsored by the Jindal School’s Institute for Excellence in Corporate Governance and Norton Rose Fulbright.
The speakers’ recommendations came just a week before the Fed’s decision on Thursday to keep interest rates at historic near-zero lows as officials continue to assess the impact of tighter financial conditions and slower global growth on the domestic economy.
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the Fed said in a prepared statement after a two-day meeting of its policymaking committee, the Federal Open Market Committee.
Short-term interest rates have been near zero since 2008. As interest rates fall, consumer spending typically increases, stimulating economic growth and causing prices to rise. Many investors believed the Fed would increase rates, but its committee is also expected to meet two more times later this year, and an initial move is possible at either meeting.
McTeer concurs with Mauldin, a well-known financial commentator and author of more than a dozen books, including his most recent New York Times best-seller “Code Red: How to Protect Your Savings from the Coming Crisis.”
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He said the central bank’s winding down of economic stimulus was long overdue and may have kept interest rates too low for too long.
“I think it’s time to rip the Band-Aid off and get it over with. The damage caused by anticipating the event has proven to be worse, in my opinion, than the damage that would result from it,” McTeer said, referring to Federal Open Market Committee’s meeting to vote on rate increases. McTeer is a distinguished fellow at the National Center for Policy Analysis in Dallas.
Experts and media have been wondering for months about when the Fed will increase rates. A wave of financial turbulence overseas has played a role in delaying the Fed’s plans.
But McTeer and Mauldin said size and speed matter more than the timing, and both endorse moving federal rates slowly and in small increments.
McTeer predicts the first rate jump will be a quarter to an eighth of a percent with another small rise or two to follow later.
“(The Fed) has promised over and over that when they start, they’re going to take their time. The problem is whenever something starts, the markets always try to guess where it’s going to end up. They tend to overshoot, so even a small increase will probably mess up the markets for a day or two,” McTeer said.
“Isn’t there a Chinese expression about getting across the river by feeling the rocks?” he said.
“I think we’re talking about slowly simply because we’ve never come from zero bound rates before. We have no clue what is going to happen. … There are a lot of theories, a lot of guessing, but let’s figure out what it’s doing and make sure that coming off zero bound doesn’t send the wrong market signals,” Mauldin said.
“But we need to start sending some signals. We can’t wait forever,” he said.
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