WASHINGTON: For the second time this year, the US central bank appears poised to raise interest rates despite fresh signs the world’s largest economy is not in peak condition. The recent soft numbers on the economy may have weakened the case for an increase in the benchmark lending rate by the Federal Reserve, which begins a two-day meeting from tomorrow to review monetary policy. But the Fed is widely expected to stick to its guns, having built up expectations that it will tighten monetary policy at this meeting, although further rate hikes this year are now in doubt.
At the policy meeting last month, the central bank left rates unchanged at between 0.75% and 1%, and policymakers said they would wait to see whether evidence supported another rate hike. But they also said first-quarter sluggishness was “likely to be transitory” and that a rate hike would likely be appropriate “soon.” This has prompted criticism that the policymakers’ forecasts are flawed and they are not basing decisions on the data, as they pledged to do. “They seem to be more committed to just getting back to some version of normal than following the numbers,” Jared Bernstein, economic adviser to former vice-president Joe Biden, told AFP. “It’s a little puzzling since chair Janet Yellen and others have said they’re going to be data-dependent.” Since the May Fed meeting, the picture has not grown much brighter, especially in the key areas the central bank watches: employment and inflation. Government data have shown clear signs of flagging job growth and a shrinking work force, with average job creation in the March-May period down 40% from the prior three months.
Inflation moved even further from the Fed’s 2% target in April, with the Fed’s preferred inflation measure at 1.7% for the latest 12 months. And, while first-quarter gross domestic product growth was revised upwards by a sharp 0.5 points to 1.2%, this is still no better than sluggish. Given the weak data, the Fed’s persistent belief the sun will come out tomorrow, and inflation will stabilise at 2% in the medium term, has drawn sharp criticism from some quarters. Economists J Bradford DeLong and Narayana Kocherlakota, a former president of the Minneapolis Fed known for advocating a cautious approach to raising rates, each accused the Fed in recent days of persistently overstating the strength of the US economy and inflation.
