Fed's Plosser wants to cause second housing crash; says Fed should raise Fed Funds rate to 2.5% within a year

The Federal Reserve should hike interest rates from current range near zero to 2.5% within a year under a plan unveiled Friday by Charles Plosser, the president of the Philadelphia Federal Reserve Bank.  Via MW:
Plosser did not give a specific time when this exit would begin but said it would have to start in the "not-too-distant future." In a speech to economists from the monetarist school on Friday, Plosser laid out an aggressive plan where the Fed would sell $125 billion of assets for each 25 basis point increase in the funds rate.
To get to the 2.5% called for by Plosser would require the selling of $1.25 TT of assets which include Treasuries, MBS, mortgages and GSE debt.  So not only would the Fed Funds rate be rising by 2.5%, but at the same time, we would have massive selling of Treasury debt which would further depress prices and spike yields. 
A slower approach could last 18 months rather than a year, he said. This would require only $67 billion of conditional sales between meetings but the funds rate would rise to 3.5%. Plosser, a voting FOMC member this year, said he did not think this strategy would disrupt markets.
To get to 3.5% over 18 months would mean the selling of $1.75 TT of assets.  Yields would increase even more from almost $2 TT of asset sales. 

Last year we were ridiculed for running stress scenarios for housing that had the mortgage rate doubling.  We also have called for the Fed to raise rates at least to 2%.  We were told that housing would go off a cliff. 

Housing will go off a cliff when this happens.  But the question that you should ask yourself is: would you rather have the pain spread out over 10 years? 

Once the Fed Funds rate increases, the interest rates for everything will rise.  Treasuries will raise across the board.  Mortgage rates will raise by a similar amount.  As rates go up, real housing prices go down.  Stocks fall as the  present value of expected future cash flows go down.  Bonds fall for the same reason. 

At the same time, we will be having GSE reform, which will raise mortgage rates even further as they slowly withdraw their support.  Private investors will demand higher yields for falling asset prices.  Mortgage rates should double under these scenarios. 

As much pain as it would cause, it will be good for the US economy.  Houses are worth less, than their current prices would indicate. 


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