Washington DC – Tensions and opinions arise around the Federal Reserve’s expected decision to finally raise interests’ rates next week, as many experts believe the Fed’s inaction has been fueling unproductive moves in asset markets.
The Federal Reserve officials have lost the certainty on how much stimulus a zero-interests-rate policy is really creating and have been threatening with raising rates for months without taking a decision. Many experts like Catherine Mann, the chief economist at the Organization for Economic Co-operation and Development, believe the Federal Reserve should have hiked rates back in September.
One issue slowing down the decision is the level of the so-called natural, neutral or equilibrium rate of interest, which is the borrowing cost that keeps the economy at full employment with stable prices. It matters because it determines how much support monetary policy is really giving the economy.
Now if the natural rate is well above the current near-zero rate, it encourages further investment and hiring as the policy will still be accommodative well after the central bank begins to raise rates. This is how Federal Reserve Chair Janet Yellen and many of her colleague’s intend to keep it.
But if the gap is smaller, the early stages of tightening could restrain the U.S. economy more than Fed officials expect. The uncertainty on where the rate lies in the aftermath of the worst recession since the Great Depression, is yet another reason for Fed officials to go slowly as they begin raising interest rates for the first time since 2006.
“There’s a lot of uncertainty about what the appropriate level is. Such discord is going to heighten the disagreement about what to do with rates.” said Laura Rosner, U.S. economist at BNP Paribas in New York, and a former New York Fed researcher as reported by Bloomberg.