Mon, Sep 14, 2015 - Page 13 News List

Global economy on edge as Fed weighs rate hike


The possibility that the US Federal Reserve could this week raise interest rates for the first time in more than nine years has injected new levels of anxiety in the global economy.

With markets still in turmoil from China’s downturn and sensitive to any added uncertainty, calls from economists for the Fed to hold off are being countered by pushes from emerging economy officials to get the long-awaited move over with.

The fierce debate underscores the complexity of the challenge facing US central bankers when they meet on Wednesday and Thursday.

The issue is whether to pull the benchmark federal funds rate up from zero percent, where it has been frozen since the financial crisis of 2008.

“We are at historically low rates right now, we have got to have a return to normal,” said Robert Morgan of the American Bankers Association.

The Fed itself is anxious to get off that extraordinarily low level, and US economic growth is strong enough to handle a quarter-point rate increase, a number of Fed officials have suggested.

For months, the policy-setting US Federal Open Market Committee under US Federal Reserve Chair Janet Yellen has been eyeing a two-day meeting beginning Wednesday for a rate increase.

Committee members base their decisions primarily on the jobs market and inflation. The former has been strong, the unemployment rate falling to 5.1 percent last month, the lowest since April 2008.

Inflation, which the Fed wants to see climb to about 2 percent as a sign of steady economic growth, has sagged. The main reason has been the drop in the prices of oil and other commodities, rather than weak US growth. However, a slowdown in China and other emerging economies, and a strong US dollar, continue to pull prices lower.

Last month, Fed Vice Chairman Stanley Fischer said the Fed would not wait for inflation to hit 2 percent before raising rates. The deflationary pressures are likely to be short-lived, he said.

However, the turmoil in global financial markets for the past month has not eased, and there is still much to be known about how China’s problems might affect the rest of the world.

In addition, the shockwaves from China’s stock market crash and Beijing’s devaluation of the yuan last month have injected a new factor.

Both the World Bank and the IMF, worried about slowing global growth, have suggested the Fed can stand pat.

“China’s stock market crumble and the subsequent reactions throughout the rest of the world have confirmed that the US remains susceptible to external shocks,” BBVA analyst Kim Chase said.

“The benefit of increasing in September is that it sends a signal to the world that the Fed is confident in the direction the US economy is heading,” Chase said.

Yet Andrew Levin, a Dartmouth economics professor who worked at the Fed for 20 years, said even the unemployment data still does not support an increase.

He said there remains ample evidence of labor market slack, including the 2.5 million Americans who have given up looking for work and the large number of people forced to accept part-time jobs.

Tightening at this point “would be a serious policy error,” he said.

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