Morgan Stanley on Real Rates

Stephen Roach, from Morgan Stanley, denounces the Federal Reserve as being spineless in the face of public outcry and calls for dramatic action to calm our current financial worries. He starts by saying: "In all my years in this business, never before have I seen a central bank attempt to spin the debate as America’s Federal Reserve has over the past six or seven years."

And, then, wraps up with a calling: "The day is close at hand when US monetary policy must get real. At a minimum, that will require a normalization of real interest rates. Given the excesses that now exist, it may even require a federal funds rate that needs to move into the restrictive zone -- possibly as high as 5.5%. Yes, this would cause an outcry -- perhaps similar to that which occurred in the spring of 1997 on the occasion of the Original Sin. But in the end, there may be no other choice. Fedspeak has taken us into the greatest moral hazard dilemma of all -- how to wean an asset-dependent system from unsustainably low real interest rates without bringing the entire House of Cards down. The longer the Fed waits, the more perilous the exit strategy."

I'm not sure I can entirely agree with him on his opinion of historical actions, but I definitely do agree with his thoughts on how things should be handled moving forward.
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