Volcker to FBN: Rates Must Go Higher

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Volcker: States shouldn't play games with their budgets

Former Federal Reserve Chairman Paul Volcker discusses how states are handling their budgets when it comes to pensions.

Former Federal Reserve Chairman Paul Volcker told Fox Business on Wednesday that interest rates must move higher for the U.S. economy to grow.

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In an exclusive interview with Fox Business’ Neil Cavuto, Volcker said the timing of a rate hike is overshadowing the need for rates to move higher as a sign that the economy is healing and returning to the strength prior to the 2008 financial crisis.

“At some point rates are going to have to go up,” Volcker said. “I think that’s inevitable.  Everybody’s said that if we have a good operating economy, you don't operate an economy on zero interest rates.” 

Volcker, who chaired the Fed from 1979 to 1987, is widely remembered for taming runaway inflation as Fed chair under Presidents Carter and Reagan by dramatically raising interest rates.

“This is a bipartisan problem,” Volcker explained.  “It is a problem of good government.  That’s what is my present concern now, and the so-called Volcker Alliance.  There's been a neglect of the kind of nuts and bolts, the administration of good government.”

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The Fed is currently mulling raising interest rates from the near-zero range where they’ve been held since December 2008. The Fed lowered rates in an effort to lower borrowing costs and spur economic growth during the worst of the financial crisis.

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The Fed is unlikely to announce a rate hike at the end of today’s meeting. But they could hint at a September rate hike if policy makers conclude a recent spate of positive economic data is a sign that economic momentum is gaining strength and that the economy can absorb higher borrowing costs.

Volcker also said many state governments are behind in the pension payments and that dramatic measures will be needed, such as spending cuts combined with tax increases, if those states are to get back on sound financial ground.

The “biggest single problem is most -- many states are not taking care of their pensions, which you're obligated to do,” he said.

“Many states are under strain financially,” Volcker continued.  “They’ve been pushing back on infrastructure, they’ve been pushing back on education, they’ve been pushing on other services.  But they're hiding the extent of the financial problem they have so that the voter doesn't realize the trouble that they’re in and they can't make effective decisions on what they want to spend money on, whether you need increase in taxes or whatever, without having the facts.”

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