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Stern Says Fed Shouldn't Wait For End Of Crisis To Raise Rates

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July 19 (Bloomberg) -- 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.

``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.

Rate Outlook

Traders' estimates of a rate increase in October rose to 64 percent yesterday after Stern's remarks were published, from 58 percent earlier in the day.

Stern dissented three times in favor of raising rates in 1996. He is the only FOMC member who's served with three chairmen: Paul Volcker, Greenspan and Ben S. Bernanke. He became the Minneapolis Fed president in 1985.

His comments yesterday underscore that ``the Fed has grown more uncomfortable with the inflation situation,'' Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York, wrote in a note to clients.

Spin for the markets are or is the Fed going to act?

If they are waiting for the markets to return to normal I think they'll be waiting an awfully long time.

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  • 401 Brexit, House prices and Summer 2020

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