Fed Likely to Confirm Economic Recovery

From Bloomberg, Fed May Signal Economic Recovery Has Begun, Affirm Low Rates:

Federal Reserve officials may signal that the U.S. economy has started to recover while maintaining their pledge to keep the benchmark interest rate near a record low for an “extended period.”

Chairman Ben S. Bernanke and his colleagues may seek to contain any investor expectations that they will begin raising interest rates as soon as this year by citing risks to the economic recovery. Today’s Fed statement may retain references from last month to rising unemployment and “tight” credit as constraints on consumer spending.

Actions speak louder than words. Real economic recovery would be accompanied by rising interest rates. Although lower interest rates will create a future inflationary spiral, they are needed for banks to recapitalize and play the yield curve. Rest assured, interest rates will remain low for as long as it takes to reline the pockets of bankers. As for long-term consequences, when was that ever a concern?

Higher Mortgage Rates

A return to growth may bolster the case for an increase in the Fed’s target rate, Stanford University economist John Taylor said in a Sept. 11 Bloomberg Radio interview.

The Fed may need to raise the rate in the first half of 2010 should inflation increase, said Taylor, who devised a guideline for setting the target interest rate based on growth and inflation.

Most FOMC officials are worried expectations for a higher federal funds rate will push up yields on 10-year Treasury notes, increasing mortgage costs, said Michael Feroli, an economist at JPMorgan Chase & Co. in New York and a former member of the Fed’s research staff.

Higher mortgage rates as a function of higher interest rates are a significant threat to economic growth. Our economy has become so structurally weak that the Fed must continue to buy housing-related debt or risk home prices dropping like a stone. Nonetheless, the Fed is powerless to stop prices from falling in terms of gold. But, since most people are fixated on the nominal price of goods, the Fed can continue to conjure up evidence to support the mythical economic recovery.

Keynesianism Strikes Again

The central bank is likely to repeat its view that inflation will remain “subdued for some time” because of slack in the economy, analysts said. Consumer prices fell 1.5 percent in the year ended in August.

I have a question: was the Weimar Republic running at 100% capacity when their currency failed? What about Argentina, Zimbabwe, or Russia? Keynesianism is based on an economic theory that celebrates bigger government, not real-life empirical observation.