Deutsche Bank's Joseph LaVorgna: Fed Should Raise Rates Now

Thursday, 12 Jun 2014 11:45 AM

By Dan Weil

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The Federal Reserve has underestimated the economy's strength and should start increasing interest rates now, says Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

In March, most Fed policymakers predicted GDP would grow 2.8 to 3 percent this year, that core inflation would register 1.4 to 1.6 percent and that unemployment would average 6.1 to 6.3 percent in the fourth quarter.

"In six months, the unemployment rate will be below 6 percent and the core inflation rate will be at 2 percent,” LaVorgna told MarketWatch. "We are way ahead of schedule." Unemployment was 6.3 percent in May, an almost six-year low.

So what are the implications for central bank policy?

"The Fed is behind the proverbial curve. The Fed should be raising rates," LaVorgna said. "I would have raised rates years ago," to push the federal funds rate above zero after the financial crisis, he said.

The Fed has kept its fed funds rate target at a record low of zero to 0.25 percent since December 2008.

David Malpass, president of Encima Global research firm, also thinks the Fed should raise rates now.

"The big question is how Federal Reserve policy reacts to the surge in asset [stock and bond] prices," Malpass, who worked in the Reagan and George H.W. Bush administrations, wrote in The Wall Street Journal.

"I believe that they reflect faster, more sustainable growth, pointing to the need for interest-rate hikes soon."

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