The case for keeping US interest rates low
After nearly seven years of zero interest rates, the inflation of which critics warned is invisible
Any increase would be significant: first, it would indicate the Fed’s belief that the policy can be “normalised” after almost seven years of post-crisis healing; second, it would indicate the beginning of a tightening cycle.
One of the reasons for believing the latter is that this is how the Fed has historically behaved: the last such cycle began with rates at 1 per cent in June 2004 and ended with rates at 5.25 per cent two years later.
Without doubt, beginning a tightening cycle for the first time in more than 11 years would be a significant moment. It would also signal more than an immediate rise in rates.
The likely destination and speed of travel are also enigmas because the US economy is not behaving normally. After nearly seven years of zero interest rates, the inflation of which critics warned is invisible. This is not normal.
But core inflation is firmly under 2 per cent, inflation expectations are well under control and nominal gross domestic product is growing steadily at around 4 per cent. Little of this suggests an urgent need to tighten. An inflation-targeting central bank is not forced by the data to move now.
A broader perspective than this is needed, especially because any first tightening is so significant. A necessary condition for making this move is confidence that it will not need to be reversed in the near future. But it is impossible at present to have such confidence.
The most powerful central bank in the world is considering whether to raise its record-low interest rates for the first time in nearly a decade. Even before the US Federal Reserve makes a move, the effects are reverberating throughout the global economy. Our project explores how.