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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

February 19, 2010 at 10:10 AM

Penalty for early withdrawal? Bernanke dips his toe into raising rates

Top of the News: The Federal Reserve has dipped a toe into its exit strategy from zero interest rates with a quarter-percentage-point increase in the rate it charges banks for emergency loans. So far, Wall Street, which has profited so mightily from the cheap credit — even if many American businesses can’t get loans — is taking the news calmly.

The Fed made the move after the market had closed Thursday; so far this morning, the Dow has avoided a swoon. The central bank has emphasized this doesn’t necessarily foreshadow more tightening ahead, but nobody thinks it can keep rates this low forever. Today’s low inflation report seems to confirm that Chairman Ben Bernanke still has a window of low inflation — so far.

Bernanke is no Alan Greenspan, who held nearly everyone in thrall to the economy’s peril. Partly thanks to Greenspan’s arrogant belief that markets would police themselves, and partly because of Bernanke’s own missteps, the Fed is one more American institution that has been tarnished. Bernanke is also presiding over the kind of tenuous consensus on the policy-setting Federal Open Market Committee that never bedeviled Greenspan. The committee’s deficit hawks are getting restless, abetted by December’s lower appetite for Treasuries by China and Japan. Others realize if the Fed makes a misstep by raising rates too fast, it could send the economy into a double-dip recession.

As much as Bernanke and many economists would love to see Fed interest-rate policy move back to a normal goal of price stability (i.e., low inflation, steady money supply), these are not normal times. Inside the numbers on persistent joblessness are some scary realities, including the jobs that have gone away forever and the groups, especially young people and minorities, facing historic unemployment.

Meanwhile, the bailed-out big banks (the 10 largest control half of all U.S. banking assets, vs. one-quarter in 1996), are back to risky business in derivatives and making money by trading rather than forming capital for productive business. The shadow banking system of hedge funds, etc., is unreformed. Commercial real estate keeps ticking and a slew of mortgages are going to reset. Debt levels in the economy are still way above historic norms.

All this argues against hasty action on interest rates. But the huge global trade and investment imbalances, along with the federal deficit and scares such as are happening in Greece, require that the Fed show its inflation-macho cred.

Normality never looked so abnormal. Bernanke’s balancing act is just beginning.

Today’s Econ Haiku:

Tiger is contrite

If only there was rehab

For the bankster gang

Comments | More in Bailout, Banking, Federal Reserve, Inflation, Macro/Big picture, Outlook

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