THE American economy faces a crucial turning point in the coming months. After over six years of near-zero interest rates and three rounds of quantitative easing, the Federal Reserve is poised to begin tightening. Is 2015 the year for liftoff?
The Fed seems to think so. According to its latest forecasts, 15 out of 17 Federal Open Market Committee (FOMC) members expect a rate hike by year-end. This view is based in part on the expectation that inflation will move towards its 2% target. An earlier rate rise would help stave off inflation while containing possible bubbles in stock and housing markets. Minutes from the latest FOMC meeting indicate that members believe an earlier hike would also “convey the committee’s confidence in prospects for the economy.”
Not everyone is convinced. The International Monetary Fund has urged the Fed to keep rates low until at least 2016. The IMF reckons that low inflation and residual slack in the labour market call for at least another few months of easy money. Hiking too early could destabilise financial markets and increase the risk of deflation. Interest rates, moreover, are not always the...Continue reading
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