After sending less than subtle messages to financial markets for more than two years that the days of always easy money are coming to an end, it is now time for the Federal Reserve to take the first step and raise rates.
A small increase – say 0.125 per cent – and continued reassurance that the Fed will take its time in moving rates back to something normal, say 2-3 per cent, should be easily accommodated by financial markets.
Delaying once again – this time because of weak emerging market trade and currencies – risks longer- term problems.
Some of the trends that are keeping inflation low – a strong dollar, weak commodity prices and subdued wages – are likely to prove transitory.
Being seen as behind the curve on inflation, together with very tight labour markets, is a recipe for greater turbulence.
The fundamental story of a global economic recovery, supported by still very low interest rates and a much lower oil price, will remain intact after the Fed raises rates.
Eric Chaney, head of research at Axa Investment Managers, says No
The time for Fed policy normalisation is coming, but the evidence is not strong enough for immediate action.
Most labour market indicators are supporting a move now. Currently at 5.1 per cent, the unemployment rate will fall further in coming months to a level that would normally prompt higher wages.
Yet the Fed should ponder before acting. First, with expected inflation falling again, inflation-adjusted rates are already rising. Second, US inflation is desperately low and keeps defying conventional analysis.
Policy-makers should have a better understanding of inflation dynamics before pulling the trigger.
Third and most important, the global economic environment is weak and uncertain.
China is slowing, probably more than official numbers show, and most emerging markets are bleeding capital in anticipation of Fed action.
Is the US economy strong enough to absorb the negative impact of a rate hike coming from overseas? Prudence says probably not.