US interest rates need to rise

Today, the Wall Street Journal speculated that US interest rates might need to rise further. It seems that the current interest rates are not in "the restrictive zone". The WSJ speculate that 8 percent interest rates might be needed to push inflation below 2 percent.

In terms of the housing market, there is perhaps little that the Fed can do right now. Long term interest rates are creeping up, and killing off what little hope there was for the market stabilizing.

WALL STREET JOURNAL EUROPE

Investors are starting to worry that the U.S. Federal Reserve will have to push overnight interest rates up in order to get inflation under firm control. But how much higher than the current 5.25% will the central bank have to go? If New Zealand is any guide, something like 8% might be called for.

Many economists think that overnight interest rates are "neutral," neither inflationary nor disinflationary, when they are two to three percentage points above the inflation rate. U.S. inflation is at 2.6%, measured by the consumer-price index, so the current overnight rate would still be within the neutral range.

If the Fed starts thinking like its counterpart in New Zealand, it will want to move well into the restrictive zone. Until a few weeks ago, such extreme thinking seemed positively un-American. Investors were confident that Alan Greenspan and Ben Bernanke, his successor as Fed chairman, would manage to get inflation down without causing much financial pain.

But with inflation trends creeping upward, in Europe as well as in the U.S., it may be time to think again. The Fed's policy of keeping rates low wasn't the only reason that prices crept up. The big U.S. trade deficit and less regulated financial markets also contributed. But the central bank's complacency in the early years of the decade increasingly looks like a mistake. It may take 8% rates to reverse it.