Friday, September 18, 2015
The global financial community has been involved in a guessing game. The sport? When the Federal Reserve will raise interest rates from the near-zero level where they are today. Yesterday was the latest iteration of the game and once again, the Fed blinked and left rates alone. This means the sport will last months longer and markets will once again be primed to react. At some point, the Fed will have a credibility issue, especially when global turmoil has eased and inflation picked up. One can assume the Fed will react quickly when that happens, but there is no certainty it will do so. The conundrum for the agency is that it is in largely uncharted territory. Economists have used the Depression of the 1930s as the analogue, but the two situations are not alike, especially in the level of unemployment. The economy is sluggish and has been for years. It is closer to Japan which has been in and out of recession for 25 years. The Fed must be asking if low growth is a new normal for the country, and if so, how should it react other than what it is doing. It is a global public relations issue.