Should the Fed raise interest rates?

29 Aug 2015 | Author: | No comments yet »

EUR/USD moves lower, following Fischer’s comments on possible rate hike.

A week ago, it seemed almost certain: The Federal Reserve would raise its key short-term interest rate next month after holding it near zero for close to seven years. Policy makers, over the past few months, had signaled as much as the US economy continued to grow steadily and the unemployment rate continued to fall.

After last week’s gyrations in global stock markets, largely tied to fears about China’s slowing economy, the debate over whether the Fed should hike rates was renewed. The comments suggested that some investors and analysts had been too quick to discount a September rate increase, particularly as markets finished the week on a relatively quiet note Friday. “We haven’t made a decision yet, and I don’t think we should,” Stanley Fischer, the Fed’s vice chairman, said in an interview with the cable network CNBC. “We’ve got time to wait and see the incoming data and see what exactly is going on now in the economy.” Fischer offered an upbeat assessment of the domestic economy.

Speaking exclusively with CNBC, Fed vice chairman Stanley Fischer indicated that recent U.S. economic data had been impressive providing a compelling argument for short-term rates to head in a higher direction. There’s simply no need for the Fed to keep propping up the economy with such low rates. ‘You look around Boston and other cities, like New York and San Francisco, and you see the effects — all the commercial construction going on, being built with cheap money. Currency traders await a panel discussion by several influential central bankers on Saturday, including Fischer at a conference in Jackson Hole for further indications on how global inflation could impact the Fed’s decision on hiking short-term interest rates next month. The three-day summit at the mountaintop resort in Wyoming will conclude on Saturday with the most anticipated event of the conference – a symposium that will also feature Bank of England governor Mark Carney and Reserve Bank of India governor Raghuram Rajan.

Pollock, a resident fellow specializing in financial affairs at the American Enterprise Institute, a Washington think tank. “The rates should be raised.” Like others who favor a Fed rate increase, Pollock said Fed policies — low interest rates and the earlier “quantitative easing” program of pumping hundreds of billions of dollars into the economy by buying government and other securities — have created distortions in markets that have led to surging stock, bond, and real estate prices. Fischer, a noted Dove, could provide some clarity on the Fed’s relatively ambiguous interpretation of its short-term projections on inflationary growth. Last week’s release of the July minutes from the Federal Open Market Committee’s last meeting painted a picture of a sharply divided Fed regarding their views on inflation.

Based on futures prices, investors see a 38 percent chance the Fed will move at the September meeting of the Open Market Committee and a 49 percent probability of a rate rise at the Oct. 27-28 meeting, according to Bloomberg. Other members, however, said that inflation conditions for a rate hike would be met or could be “met shortly.” The Consumer Price Index for July inched up 0.1% on a month over month basis, below consensus estimates of a 0.2% increase.

Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, rose more than 0.5% to an intraday high of 96.35, before falling back slightly to 96.15 in U.S. afternoon trading. Inflation, they add, is so low that a shock that further weakens the economy could lead to deflation, the destructive cycle of falling prices and wages, and high unemployment.

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