Wednesday, December 16, 2015


The Federal Reserve looks poised to raise borrowing costs for the first time in year. The move is widely expected – but not everyone agrees it’s the right move.

David Blanchflower (below), former Bank of England policymaker, economics professor at Dartmouth College

The FOMC looks set to raise rates this week. That will likely be a major macro error at a time when oil and commodity prices are tumbling and there is no inflation. Most of the growth in the US economy is driven by the monetary stimulus; tightening now will rapidly have adverse effects, including on the manufacturing sector from the strengthening dollar.

The US labour market is a long way from full employment even though the unemployment rate is 5%. The proportion of adults who are out of the labour force is down four percentage points from its pre-recession peak and the high levels of underemployment have diminished only slowly.

Unemployment, underemployment and inactivity are all pushing down on wage growth, which remains flat. If they do hike this week, I expect the move after that to be a cut – perhaps even to negative, as the ECB had to do after they raised too soon in 2011.

Rob Carnell, chief international economist at ING Commercial Banking 

Not only do I think the Fed are going to hike, I think they should hike – but I also think they should have hiked some time ago. There is a byproduct of quantitative easing and maintaining these very low rates for a considerable period. People have got into thinking that rates will stay low for a long period. Very low interest rates were helpful in the early stages of the crisis, but as things have progressed they have encouraged people, particularly at the lower end of the income scale, to take on more debt, to the extent that when rates do rise they will be in a less healthy position. And as for spending, are very low interest rates making people go out and spend? No. They are, if anything, making people have to save a bit harder. Now the economy looks in pretty decent shape, with a few pockets of weakness, moving out of this emergency policy position makes sense. And on aggregate, this could free up some spending, and actually send a note of encouragement, as it says loud and clear: “The crisis is over, go and spend.”

Philip Shaw, economist at Investec 

The US economy is now around 10% bigger than it was at its pre-crisis peak, so the question is: why have interest rates stayed close to zero? The labour market is tightening, there is some evidence that wage pressures are rising and it feels like the right thing to start tightening policy. Of course, there are always risks. Moving in September would have been wrong given a very uncertain backdrop in terms of financial market volatility.

But not moving also carries risks because of beginning to condition firms and households to interest rates being on hold forever. The new focus in the US monetary policy debate should shift away from “lift-off” towards the pace of tightening. I think the key policy question is what the Fed means by “gradual”. It hides a multitude of things.

Aneta Markowska, US economist at Société Générale

I fully agree that the Fed should raise rates next week. Indeed, I think they should have hiked six months ago: the prolonged anticipation contributed to market volatility which could have been avoided. But why hike now when inflation is still so low? The first reason is optionality, which should promote greater financial stability.

Waiting to hike until the last moment will leave the Fed with only one path, and it is likely to be steep and disruptive. By going earlier, it can move gradually. Another reason for hiking sooner rather than later is to test the waters. The US economy has gone through big structural changes, from financial regulation and population aging, to so-called “Uberisation”.

 As a result, I suspect that we will be less interest-rate-sensitive compared to past cycles. The first few hikes may even prove stimulative as they boost income from savings, net interest margins and confidence. As the saying goes, you never know until you try.

Kathy Bostjancic, Head of US macro investor services at Oxford Economics

The Fed should raise the target for the Fed funds rate by 25 basis points to a ¼-½ per cent range. However, we believe the Fed should engineer just two rate hikes in 2016. Dollar appreciation limits the prospective tightening since the strong dollar has done some of the tightening for the Fed. We calculate that the dollar appreciation to date has the equivalent impact on economic growth as about four Fed rate hikes.

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