“At some point, the Federal Reserve will finally have to raise interest rates, and the results won’t be pretty for the economy and the housing and financial markets, says Harvard economist Martin Feldstein.
The Fed has said it plans to lift its federal funds rate target — now at zero to 0.25 percent — when the jobless rate falls to 6.5 percent. In December, the unemployment rate was 7.8 percent.
Right now, with the 10-year Treasury yield at 2.02 percent, the inflation-adjusted yield is really negative, notes Feldstein, who was chairman of President Ronald Reagan’s Council of Economic Advisers.
“If we take long-term bond rates to anything like a normal number, that means higher bond interest rates, higher mortgage interest rates, pressure on the stock market and pressure on house prices,” he tells CNBC.
It doesn’t matter whether the Fed is able to raise short-term rates in an orderly fashion, Feldstein says. “Orderly is fine, but it still has to mean higher interest rates,” he points out.
“Once the market begins to focus on the fact that loan rates are going back up, we’re looking at a 4 or 5 percent 10-year Treasury yield. That will have an important impact on mortgage rates, house prices and the prices of other interest-rate sensitive assets.”
A Fed tightening also could spark inflation. “What worries me is the possibility that inflationary pressures could build up when the economy is still looking at high levels of unemployment,” Feldstein notes.
“It will be a challenge for the Fed to raise interest rates in a timely way. I think that could lead to inflationary pressures, which would contribute to higher long-term rates simply out of expectations of inflation.”
The housing sector is in the midst of a rebound, with the S&P/Case-Shiller index showing home prices rose 5.5 percent in November from a year earlier. But Feldstein believes the Fed is artificially propping up the residential real estate market….”
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