Stern Says Fed Shouldn’t Wait for End of Crisis to Raise Rates

Vivien Lou Chen
Bloomberg
Saturday, July 19, 2008

The Federal Reserve shouldn’t wait for housing and financial markets to stabilize before it begins raising interest rates, central bank policy maker Gary Stern said.

“We’re pretty well-positioned for the downside risks we might encounter from here,” Stern, president of the Federal Reserve Bank of Minneapolis, said in an interview yesterday. “I worry a little bit more about the prospects for inflation.”

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.

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“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 Stern, 63, the Fed’s longest-serving policy maker. “Our actions will affect the economy in the future, not at the moment.”

The bank president compared the credit crunch to the one in the early 1990s, which restrained economic growth for almost three years. That’s a more sanguine assessment than others have. The International Monetary Fund has said it’s the worst financial shock since the Great Depression. Former Fed Chairman Alan Greenspan said it’s the most intense in more than half a century.

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