Atlanta Fed President Dennis Lockhart became the latest member of the Federal Reserve Bank system to note that keeping interest rates at 0% is not a sustainable economic stimulation policy in a speech today.
The dollar is often shielded from textbook supply/demand issues due to its position as the global currency of exchange. More recently, debt distress in Europe and political concerns in England have further solidified the buck's position as the World's safety valve in problematic times. Because of this, the American government has been able to print money over the past few years to fund multiple military actions and in attempts stimulate the economy.
However, even the dollar is not completely immune from economic reality. Elsewhere, with a non-supported currency, history has shown us that this type of behavior inevitably leads to high inflation. The dollar is strong, however it is not outside the realm of economic reality. Coupled with current unemployment levels, continuing to run the printing presses at the Fed banks could make the current economic crisis look like a mini-boom.
It is true that America has, to some extent, been able to spend in the face of declining demand and unemployment. But such a course is not indefinitely sustainable. In one scenario, such behavior could lead to future asset bubbles similar to that which caused the housing crisis. In the worst-cased scenario, it could ultimately lead to economic collapse. A decision by the Chinese or OPEC states to unwind their dollar-denominated debt holdings or additional stimulus plans at 0% funding rates would bring this day of reckoning even closer.
Raising rates may be painful in the short-term. However, economic theory and common sense point to an increase in interest rates, even before recovery is safely underway.
UPDATE: Lockhart is not the only one: Thomas Hoenig is on the same page.
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