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Experts Say Timing of Rate Hikes Is Crucial
August 23, 2009

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Jackson Hole, Wyoming. When the time comes for the US Federal Reserve and other central banks to ward off inflation by boosting interest rates from their current super-low levels, they shouldn’t hesitate, an economist and expert on monetary policy warned this past weekend.

Even though the US and global economies are healing from th e worst recession since the 1930s, many economists think it will be a while before central banks start lifting rates. In the United States, economists think the Fed won’t begin pushing up rates until next summer.

Still, when that decision is made, interest rates will need to be “increased aggressively,” said Carl Walsh, a professor at the University of California, Santa Cruz, at the final day of an annual Fed conference here.

“Committing to a gradual increase in the policy rate is not justified,” he said.

Consumers, businesses and investors, he argued, must feel more confident that prices won’t spiral higher in the future.

The high-stakes questions of when and how the Fed should start boosting record-low interest rates came up frequently at the conference. Timing is vital. Act too fast, and the Fed risks choking off lending to businesses and consumers. Wait too long, and it risks setting off crippling inflation.

Jean-Claude Trichet, president of the European Central Bank, however, favors a “steady-handed” approach in moving rates. “A gradualist approach of this kind may be the most effective antidote to the threat of price stability,” he told the conference.

Although some participants seemed to have mixed thoughts on how quickly the Fed would need to push up rates once it starts tightening, many agreed that it will be critical for the Fed to communicate its intentions clearly to avoid confusion and jolts to financial markets.

This month, the Fed left the target range for its bank lending rate at 0 percent to 0.25 percent. And it pledged to keep it there for an extended period to help nurture an economic recovery.

Associated Press