14th September 2012
"Is the US going to have 3.5% mortgage interest rates forever? If the central banks does manage to create a bit more inflation, how does it think it will exit? A mere 1% increase in interest rates, from 3.5% to 4.5%, increases mortgage payments on a 30 year fixed rate mortgage payments by 13%. That will translate into a meaningful dent in housing prices. And where does the Fed go if a financial crisis or other shock occurs."
Similarly, a Wall Street Journal op-ed piece says the deeper into exotic monetary easing the Fed goes, the harder it will also be to unwind in a timely fashion.
"Mr. Bernanke says not to worry, he has the tools and the will to pull the trigger before inflation builds…….That's what central bankers always say. But good luck picking the right moment, which may be before prices are seen to be rising but also before the expansion has begun to lift middle-class incomes. That's one more Bernanke Cliff the economy will eventually face-maybe after Ben has left the Eccles Building."
Indeed, in a piece for the National Review, Representative Kevin Brady (R., Tex.), argues that it's time for the Fed to stop before the Fed's eventual "exit strategy" becomes too difficult to execute.
"Chairman Bernanke should look President Obama and Congress in the eye and tell them the Fed has done all it can to boost growth-perhaps too much. He should state clearly and unequivocally that if the president wants stronger job creation now – before the election – then he should work with Congress to remove the tax, spending, regulatory, and health-care roadblocks jackknifed across America's economy now."
"Monetary policy can't solve what poor fiscal policy has created."
Professor Geoffrey Garrett, CEO of the United States Studies Centre and the Dean of the University of Sydney Business School, however, explains to The Conversation why the central bank isn't worried about an exit strategy just yet.
"I think the Fed believes that it must act now and deal with the future in the future. Secondly, the thing that is distinctive about the US – and we've now seen this for several years – is that unlike Greece, Spain, Italy, or France, the global capital market is still willing to underwrite at US government debt at incredibly low interest rates. Last time I looked, the ten-year T-bill is trading at under 2%. The world capital market is saying that US government debt is still the gold standard asset."
Previously on The Financialist: