Time for divided Fed to look beyond caution

The Federal Reserve is playing it safe amid the looming uncertainty. That’s what the minutes of its last meeting on July 26-27 reflect. The Fed officials are still divided over interest-rate hike, even though New York Fed chief William Dudley flagged the prospect of an increase as soon as September. However, the minutes clearly show that the policy makers are weighing jobs-market strength versus little risk of a marked pickup in inflation. They want to put on hold the hike until they are fully assured of the overall economic
activity.
The dovish tone of Fed has put a hurdle on the dollar’s attempt to rally from a three-month low. “We’ve basically seen the dollar run out of steam,” said a Newark-based investment strategist. Despite scepticism, the US central bank’s rate ambivalence has proved boon for many. Among the biggest gainers are American companies that earn from overseas. These firms which have more than half of their sales outside the US are rising and they should thank Fed for their zooming revenues. The Fed move to keep the rate unchanged for now has also befitted the bullion. Gold went up for a fourth straight day on Thursday as the dollar retreated after the Fed’s July meeting minutes were made public.
Some policy makers — like Dudley — are in favour of raising the rate soon, considering the headwinds in the markets. But many believe that there is no need to do so right now. Data project a mixed picture of the US economy. While the labour report has reasons to make one optimistic, stagnant retail-sales raise a wave of worry. And therefore, a shaky, indecisive Fed continues to postpone the hike decision. The pertinent question is how long can such a move be delayed? Will the Fed press the panic button only when the menace
becomes insurmountable?
The Fed is looking for an elusive consensus. Rather, it should take a deep, long look into the growth, hiring and inflation. Waiting for too long could mean the troubles pile on and are unmanageable when they are let loose. Threats come unannounced and the Fed needs to prepare itself for the imminent dangers.
“The market expectations for a rate hike in September are still low and Fed committee tends to be cautious,” said economists at IHS Markit. Perhaps, Fed will wait for data on trends and labour market strength to become more persuasive and take a decision in December. The only concern is if the decision is not taken in September, crucial time might be lost.
It is to be remembered that the Fed ended 2015 by increasing the key target federal funds rate for the first time in a decade. Hence, it might be waiting for December for a rate hike move. There are still four months for 2016 to come to a close and with the economy in a flux, Fed should keep its options open.
There are no signs that volatility that is affecting the world economy would end anytime soon. The Fed must show flexibility when the time comes. The policy makers should know it best when to act. And if they can’t, the country’s policy regime must stop reliance on its central bank and take the reins in its hand!