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The Federal Reserve’s decision to keep interest rates untouched was born out of optimism and apprehension. In the end, the Federal Open Market Committee (FOMC) resorted to a studied restraint. And while doing so, they issued an upbeat statement about the improving economic conditions in the US, but didn’t rule out the possibility of hiking the rates should there be domestic headwinds. It is like a ‘wait-and-watch’ policy since ‘the sky isn’t falling’ yet.
It is true that figures show there have been some positive economic developments, which include strengthened labour market after the May dip. But figures don’t tell the entire story. The Fed should see beyond these stats. Of course, numbers reflect that there has been job creation, but how many people have really got the job? If there is job security, why are so many people whining about unemployment? The Fed must look into the problem from a wider perspective and should not feel that the risks to economic outlook have diminished. They haven’t, actually. And when they sit in September for the next meeting, the panel must carry out a thorough check of the economy. The central bankers should not wallow in misplaced optimism. And take measures to avert a crisis, which may be impending.
Right now, refraining from adopting a new policy measure doesn’t look bad, though. It is always better not to rush into things when you are unsure. But being too tardy can wreak havoc too. If you keep waiting, you may miss the bus. The Fed has to aim at bringing about financial stability while being cautious. That’s a huge challenge. And it should take a timely decision, not keep procrastinating. Let the move come gradually, but don’t delay it for too long.
After Fed’s statement, Fed funds futures indicated a 46.5 percent probability that the committee would increase rates before the end of the year. Earlier, this was put at 49%. If the jobs report for July on August 5 paints a positive picture, the Fed could become complacent. What Fed needs is to keep a close watch on labour utilization and inflation. Besides this, household spending and business investment have also to be monitored. Retail sales, housing starts, capacity utilization and service industries can’t be overlooked.
The Fed has to base its next decision after taking all factors into consideration. They need to properly upgrade their assessment of the economy by weighing all data available and not just go by a few numbers, indicators and readings.
The September meeting would be very crucial as it will decide the future course of action of the Fed. It is important that while being guarded, it takes baby steps towards a long-term gain. What is necessary is to keep an open mind. Things might be looking better in the US, but turmoil in the international market can’t be downplayed or ignored. It is foolish to think that the volatility in world’s market will not impact the US. It will.
Despite the optimistic show of numbers, the Fed realises the threat to US economy is far from over. The overwhelming evidence of a strong economy doesn’t mean the risks aren’t looming. Fed has handled the situation – which is still in a state of flux – so well till now. Let’s see how it combines caution with action in the coming months.