It is well known that the economic recovery in the U.S. has been consistently
weak leading the Fed to repeatedly push back the timeframe for raising rates.
The U.S. Fed has maintained that the appropriate time to raise rates is when
sustained improvement in the labour market is attained and when it is
“reasonably confident” that inflation will move back to its 2 per cent target
over the medium term.
The debate today revolves around how soon the
tightening should occur. The question that plagues the fed’s presidents is what
poses a greater risk- raising rates too slowly or raising rates too quickly.
They worry that postponing the decision to raise rates might lead inflation to
become too high while raising it quickly might disrupt
growth.
FOMC members support December rate
hike
After the third round of QE came to an end, the Fed
announced that “it likely will be appropriate to maintain the current target
range for the federal funds rate for a considerable time.” The decision to keep
rates at zero till date has sparked debate over whether the Fed is normalizing
policy too slowly to maintain price stability. Most FOMC members believe it
would be appropriate to raise the federal funds target before the end of
2015.
Inflation has lingered below the Fed’s 2 per cent target for more
than three years now while prices in the U.S. rose 0.3 per cent in the 12 months
through July. Fed Vice Chairman Stanley Fischer is of the opinion that “there is
good reason to believe that inflation will move higher” when factors impacting
rise of inflation such as oil and a strengthened U.S. dollar, dissipate.
To further strengthen the argument in favour of a rate hike, the
non-farm payroll reports which stated that companies have added 1.5 million
positions this year was highlighted.
Rosengren admits to
uncertainty about inflation
Boston Fed’s president Rosengren
observed that recent reports on wages and salaries point towards few signs that
the “tightening labor markets are translating to increases in wages and salaries
consistent with reaching 2 per cent inflation”. He did however add that “there’s
an awful lot of uncertainty about inflation”.
Federal Reserve Governor
Lael Brainard Brainard has also spoken about the steady improvement in the
labour market and how the slack in the economy has reduced. However she too did
mention that core inflation is below target and some measure of inflation
compensation has dipped even lower.
Why it is not right yet to go
for monetary tightening policy
The U.S. Federal Reserve that has
engineered recovery post 2009 depression is currently less worried about the job
market. They read the slowdown in payrolls' growth as a sign of near-full
employment. It is evident from the statements of the Fed presidents that they
are convinced the time is right to raise rates.
Once the rate is upped
the money circulation will tighten and consumer sentiment will take a hit. There
will less to spend which will adversely affect inflation. Given current and
forecast conditions, it thus does not seem wise for the Fed to go for immediate
tightening.
