While some Fed officials have said they expect rates to rise in September, Mr. Fischer, in prepared remarks, didn’t specify a month, saying only “it will be appropriate to raise the target range for the federal funds rate when we have seen further improvement in the labor market and are reasonably confident that inflation will move back to 2% over the medium term”.
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William Dudley, the president of the Federal Reserve bank of New York, quoted at a Reuters event that interest rate will increase if the U.S. economy continues to improve. Moreover, the Fed is likely to start raising rates later and more slowly than in previous cycles, responding gradually to signs that USA economic growth is robust enough to sustain higher borrowing costs.
“If the data continue to evolve in the way they have, I think September is very much in play”, Dudley says.
The Fed is working to minimize the likelihood of surprises and unnecessary volatility by communicating policy strategy clearly, he said.
Some investors are betting worldwide turmoil, including the possibility of a Greek exit from the euro, could be a reason for the Fed to put off a rate increase this year.
But on the other hand, if the Fed raises rates too soon, there is a chance that the economy might stumble again. Because all have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising USA rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further.
Asian and European central banks are pursuing aggressive monetary policies aimed at weakening exchange rates for their currencies against the dollar and boosting exports at the expense of sales of U.S.-based businesses. The concern is understandable: when the Fed signalled in 2013 that the end of its quantitative-easing (QE) policy was forthcoming, the resulting “taper tantrum” sent shockwaves through many emerging countries’ financial markets and economies.
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Economists and analysts, most of whom were predicting a rate hike by now, have jumped into lockstep about when the Fed will act. With policy rates at or close to double-digit levels in many of those economies, the authorities are not behind the curve the way they were in 2013.
