Will the Fed Raise Rates in 2013?

The Fed continues to be battered with evidence from influential economists as well as its own top officials that the economy will be ready for an increase in the Fed Funds rate next year. Many of the arguments are coming as a result of the unemployment numbers moving towards the 8% number (now at 8.3%).  The Fed seems to dismiss the signals and point towards an overall strategy of promoting long term growth as a reason to keep interest rates low for the foreseeable future.  That said the arguments are getting louder for the opposite and it will surely be an ongoing debate.  With the election coming quickly and Obama’s desire to show strong economic data in the weeks and months leading into November, the low rates will certainly assist in pointing towards a strengthening economy.  But what is in store for 2013-2014? Housing will surely not have fully recovered, so how will tighter monetary policy effect such?

More importantly how does such talk effect all of those future home buyers that have been sitting on the sidelines.  There are a number of buyers waiting for the perfect opportunity.  The low rates coupled with strong buyers market and depressed real estate prices has created an opportunity of a lifetime for many home seekers.  Pulling the trigger is the problem.  Job concerns, worries about the economy and what will be, etc. continue to be bothering the psyche of the current home buyer.  One has to imagine that economists pointing towards GDP of 3% plus along with the call for the Fed to slowly increase the Funds rate has to provide that incentive for sidelined buyers to act sooner then later.

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Article from Reuters this morning on St. Louis Fed President’s disagreement with the Federal Reserve’s wishes to keep the Fed Funds rate at zero through 2014.

(Reuters) – The Federal Reserve should start raising interest rates next year, a top Fed official said on Monday, arguing that many years of near-zero rates will do little to return economic output to pre-recession levels and risks causing “disaster.”

St. Louis Fed President James Bullard said he disagreed with the Fed’s decision last month to keep interest rates exceptionally low through late 2014 to bolster a recovery that was moving too slowly.

Bullard, who does not have a vote on the Fed’s policy-setting Federal Open Market Committee this year, is seen as a policy centrist.

“It’s important to start to remove accommodation – even when you go up to 1 percent or 1-1/2 percent, that’s still very easy monetary policy,” Bullard told reporters. “It’s a matter of getting to a normal level of interest rates at the right time. I don’t think you want to wait until everything is exactly the way you’d expect it to be.”

Fed Chairman Ben Bernanke last month gave a bleak assessment of the economy and left the door open to new bond purchases to boost growth, a move that Bullard said he would support only if the economy worsened further and the threat of deflation re-emerged.

The Fed cut rates to near zero more than three years ago and has bought $2.3 trillion worth of bonds to spur economic activity.

Because the recession was brought on by a collapse in housing that destroyed household wealth, unemployment is likely to stay high and labor markets will improve only slowly even if rates are kept low for years, Bullard said.

The belief that the U.S. economy suffering from an “output gap” that can be bridged only if borrowing costs are kept low enough for long enough is wrong, he said.

“If we continue using this interpretation of events, it may be very difficult for the U.S. to ever move off of the zero lower bound on nominal interest rates,” Bullard said. “This could be a looming disaster for the United States.”

The U.S. economy is on track to grow at a 3 percent rate this year and to strengthen further next year, Bullard said. That should help push the unemployment rate below 8 percent by the end of this year, he projected.

It registered 8.3 percent in January, and most Fed officials last month saw the rate staying above 8 percent through this year.

Meanwhile, inflation, while falling, is running above the Fed’s newly set target of 2 percent.

Bullard said keeping rates low for several quarters is very different from keeping them there for years, which punishes savers. Younger generations hurt by high unemployment are not increasing their consumption to make up for the decline in consumption among older generations, he said.

“In this sense, the policy could be counterproductive,” he said.

Some lawmakers in Congress levied a similar criticism against Bernanke last week, saying the Fed’s low-rate policy was hurting savers and, in Congressman Paul Ryan’s words, “bailing out” debtors.

Charles Schwab Corp’s eponymous founder, in an op-ed in the Wall Street Journal on Monday, took the argument further, saying rock-bottom interest rates are destroying confidence in the economy and are unwisely forcing older savers to take risks with their money in search of decent investment returns.

In testimony last week, Bernanke said the Fed was “quite aware” of the costs of low-rate policy for savers, but he has repeatedly made the case that fostering faster growth overall is more important for the economy as a whole.

Bullard said he welcomed the Fed’s adoption of an explicit inflation target because it may keep the central bank from allowing higher inflation in pursuit of bridging an illusionary output gap.

“This is an important development, as it may prevent the U.S. from repeating the mistakes of the 1970s, in which a misreading of the size of the output gap led the Fed to maintain easy monetary policies for far too long,” he said.