Federal Reserve Bank of Cleveland President Loretta Mester said a strengthening US economy is ready for higher interest rates as she predicted growth of 2.5 percent to 2.75 percent through the rest of this year and next year and called for a gradual path of tightening after liftoff. Investors now expect that the Fed will raise rates from zero in December for the first time since the financial crisis.
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“I see the risks right now of moving too quickly versus moving too slowly as almost balanced”.
Investors and analysts now regard a December increase as all but certain, barring unexpected developments.
Economies in Europe, China and Japan all are under stress and slower growth overseas will weigh on the USA economy, argues Steven Ricchiuto, chief economist with Mizuho Securities. Raising rates would begin to reduce that effect. And then there’s the stubbornly strong USA dollar, which will only gain strength if and when interest rates start to rise.
After holding fire in October, Fed officials have one more chance to lift rates from their extraordinary near-zero threshold before the end of the year. The steady downtrend in sales, as can be seen below, is not indicative of an economy that is strengthening, as several Fed policy makers suggest.
Based on this report, along with the recent one on employment/unemployment, one could easily make an argument that the Fed hiking interest rates is a slam dunk decision.
I do not understand how the Fed can believe that it is remotely close to achieving its inflation mandate of stable prices, or a rate of inflation that approaches 2%.
Not surprisingly a cautionary note came from Chicago Fed President Charles Evans, who is worrying that any rate increase could possibly damage the recovery and put the U.S in the same hard “hole” that the Europeans have found themselves in, when they tried to raise the rates at a time when the rest of the world was desperately trying to hold them down. “Consequently, overall PCE inflation is likely on this account alone to rebound next year to around 1-1/2 percent”.
Translation: We have no idea what’s going on, or whether or policies are helping or making things worse. “I would view this as an important policy error”.
So far, most inflation gauges remain below that level.
“The fundamentals supporting domestic demand look quite sturdy”, Dudley said.
In his speech, Fischer was decidedly upbeat. But he suggested there was no reason to keep waiting.
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“The USA economy appears to be weathering those shocks reasonably well”, Fischer said, speaking at an event at the Fed’s Board of Governors in Washington.
