DISSENT AT THE FED: IS THE ECONOMY STAGNANT?
Market analysts and investors may be predicting a feasible interest rate hike in December, but the Fed officials remain split over whether the economy is strong enough to keep up with a sudden rate increase, stuck in a rut or it hovers in between.
The U.S. central bank arrived on a decision to hold the interest rates steady on Wednesday, 21st September in Washington. The Federal Reserve opted to raise interest rates last December for the first time since 2006. Most investors expect the Fed to embark on increasing interest rates this December; but according to a CMC Markets analyst in New York, there is only 55 per cent probability for a rate hike at the end of the year.
With the unpredictable presidential election and some few months of analysing economic data still coming, the Fed officials implied the debate has not yet started. In fact, Charles Evans, Chicago Fed President, said in a meeting held in St. Louis on Wednesday that the low interest rate scenario does not imply a U.S. phenomenon, or just a situation created by the Federal Reserve rather it is a worldwide concern which is deeply rooted in the economic fundamentals that is likely to continue pressing.
In contrast, President Loretta Mester of the Cleveland Fed stated that it is purely not correct to disregard the practice of increasing rates before a rise in inflation. She also suggested that it is practical to always learn from history. "We should not be led to believe that this time it is going to be different," she insisted in her first comments since she opposed the September 21st decision.
She was so precise in her comments which led her to comment on the urge to always stick with the status quo. "It is attractive to always embrace the status quo," she said, "and if the Fed will wait for every data to line up, then U.S. may suffer as a result."
President Mester's views were supported by Esther George, the Chief of Kansas City Fed. She also disagreed with FOMC's September meeting decision. She insisted that rates had to increase slowly but at a pace that the economy will allow; if that will not be the case, then a time will reach when the Fed will be forced to raise the interest rates aggressively.
On Tuesday last week, the Fed President of San Francisco, John Williams stated that as time goes on it becomes more difficult to support low rates and getting greedy on attempting to reduce unemployment may impact negatively to the economy.
President Neel Kashkari of Minneapolis Fed supported the FOMC's move by indicating that rates can stay low because there are no signs of inflation yet. "The economy still has time to run just before it overheats," he stated.
The Fed Chair Janet Yellen, remained open, indicating that the decision to increase rates was compelling, but the economy still had a lot of room for job creation. She appeared before a committee on financial services on Wednesday in a hearing that largely considered regulatory aspects and changes they may make regarding annual tests on banks.
Evans' remarks pointed out the dueling visions of the Fed over the position the economy holds eight years into an unequal recovery.
George and Mester were among a group of Fed's regional presidents who dissented on September 21st FOMC's meeting decision, and others shown a need for the Fed to act swiftly to avoid a run up in inflation.
The opposing organisation of thought, with its supporters among the Fed's more influential board of governors that are based in Washington, argue that the U.S. and global economies have become sluggish since the 2008 financial crisis took the world on a wild ride.
Evans indicated that weak economic growth, poor productivity and an aging labour force may leave the U.S. with low rates for quite some years still to come; while the Fed will be left trying to attain its 2 percent inflation with difficulty.
For sure Fed's decision to closely monitor the economy before deciding on whether increasing rates will be the best decision. However, there are always dangers that lurk whenever we attempt to be overcautious.