FOMC’s longest-servingpolicymaker reasons that credit crisis won’t see an end so soon

Rate rise can’t wait: Stern

FOMC’s longest-servingpolicymaker reasons that credit crisis won’t see an end so soon

Monday • July 21, 2008



THE Federal Reserve shouldn’t wait until financial and housing markets stabilise to raise interest rates, central bank policymaker 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,” said Mr Stern, president of the Federal Reserve Bank of Minneapolis. “Our actions will affect the economy in the future, not at the moment.”

The comments by Mr Stern, a voter on the rate-setting Federal Open Market Committee (FOMC) this year, reinforced traders’ forecasts for a rate increase by the end of the year. He indicated that the rescue plan for the two mortgage finance giants Fannie Mae and Freddie Mac will help prevent a deeper housing and economic slump.

“We’re pretty well positioned for the downside risks we might encounter from here,” said Mr Stern, 63, the Fed’s longest-serving policymaker. “I worry a little bit more about the prospects for inflation.”

The bank president compared the current credit crunch to the one in the early ’90s, which restrained economic growth for almost three years.

United States government figures showed consumer prices in June surged 5 per cent over the past year, the biggest jump since 1991.

“Headline inflation is clearly too high,” saidMr Stern. Crude oil has surged 73 per cent in the past 12 months and rose to a record of US$147.27 a barrel on July 11. Worldwide, prices for food commodities such as wheat and rice were 43 per cent higher in April than a year earlier.

Mr Stern declined to say when policymakers may shift toward raising rates. The FOMC halted its series of seven reductions last month, after reducing the benchmark rate to 2 per cent, from 5.25 per cent last September. Traders anticipate the Fed will boost the rate at least a quarter-point in October.

Minutes of the Fed’s gathering on June 24 to 25, released last Tuesday, showed that some Fedofficials favoured an increase in rates “very soon”.

“This is a very challenging policy environment,” said Mr Stern, adding that an end to the credit crisis will take some time.

Worries remain over the wider health of the sector. Dealers said that Singapore shares are likely to trade down this week amid persistent fears the worst is not yet over for the troubled US housing sector.

The Straits Times Index lost 16.37, or 0.6 per cent, to 2,847.73 last Friday. The STI fell 2.7 per cent last week, its biggest loss since the week ended June 13.

“The ride forward is not without pitfalls,” analysts from Westcomb Securities said. “The US housing problem is not yet over. It could still post some short-term shock to the market.”

However, other dealers expect that a further decline in oil prices, which dropped sharply to less than US$130 last week, could see some Asian shares rebounding. agencies

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