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Fallout: The Financial Crisis

What the Fed is watching and seeing

Marketplace Staff Aug 10, 2009
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Fallout: The Financial Crisis

What the Fed is watching and seeing

Marketplace Staff Aug 10, 2009
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TEXT OF INTERVIEW

Bill Radke: Federal Reserve policymakers start meeting tomorrow. They are trying to navigate this economy with the inflation rocks on one side of the channel and the deflation boulders on the other. side Gary Hufbauer is senior fellow at the Peterson Institute for International Economics — good morning.

Gary Hufbauer: Hi.

Radke: What’s going to happen at this two-day Fed meeting that starts tomorrow?

Hufbauer: Well I think the surprise would be if there is any surprise. The Fed is probably pretty satisfied with what they’ve done. I think they’re now in a watch-and-see mode.

Radke: You say watch-and-see. Let’s talk about what they’re watching and what they’re seeing. The unemployment report last week was relatively good with the rate coming down a little. The stock market’s booming. What do you think the Fed is watching and seeing and taking into account?

Hufbauer: Well what they would be concerned about is any ignition of inflation, that’s their big worry. But so far there aren’t any inflationary signs. As you said, unemployment dipped just a little bit. But it is higher than anybody would like, including the Fed. So they’re not inclined to tighten yet until they see those first flowers of inflation, and they’re not evident yet.

Radke: The last Fed Chairman Alan Greenspan has sure gotten a lot of criticism for how he walked that tightrope. What’s your view, Gary, on this decision to continue to keep interest rates low?

Hufbauer: Well I think they’ll probably keep it low through the remainder of this calendar year. And we’ll begin to see higher rates early in 2010. And you’re right. They’re very aware of that tightrope, and they’re very aware of the possibility of new asset bubbles, exactly what Greenspan would be. Now where would the new asset bubbles be? Well there’s one that’s pretty obvious to everyone, and that’s actually Treasury bonds. I mean they’re selling at extremely high levels, meaning very low interest rates on 10-year Treasury bonds. So there is a possible asset bubble, and today’s asset bubble is tomorrow’s crash.

Radke: Gary Hufbauer, senior fellow at the Peterson Institute for International Economics. Thank you so much.

Hufbauer: Hey, thanks for calling.

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