US Fed right in not raising interest rate
It will do well to leave the benchmark index unchanged even after its September meeting
W hen the policymaking committee of the United States Federal Reserve assembled in Washington on Wednesday for their regular bi-monthly meeting, they pondered on whether the key benchmark interest rate should be increased after reviewing all of the economic data that has emerged as drivers to the US economy. Job figures are strong, the US economy is creating more employment, giving more workers pay cheques and those workers are spending on new homes, new vehicles, new consumables — activities that add new jobs for those who build those homes or deal in consumables and services.
Not surprisingly, the statement that came out of the US Fed was upbeat, noting that the economy had overcome wobbles this year and that job creation had increased amid moderate economic growth. With a presidential election in November, more Americans at work and having more money is a positive for the Democrats, with Hillary Clinton being able to champion that she will take over from where President Barack Obama leaves off. But it’s also a boon for Republicans, who can point to their control of both houses in Washington as being the reason for sound federal policies in place to create the environment for stable economic growth.
The tone of the statement from the Fed gives every indication that it will indeed increase interest rates when it gathers again at the end of September. But that seems a little unrealistic, given that an interest rate hike will mean American voters will suddenly have to pay more on their credit cards or to borrow for those vehicles and consumables. There is also a bigger picture, beyond the US, that the Fed must consider. And that’s a picture that’s a little unclear.
Increasing the Fed rate means that the dollar becomes stronger. That makes foreign vehicles and consumables cheaper to buy, but hurts the US economy overall, making US-made goods and services more expensive for others to buy. It also decreases the value of currencies such as the euro and the pound in relation to a stronger US dollar. Given that the full extent of the economic fallout of the Brexit vote in Britain has yet to become clear — and the pound has fallen to 30-year lows in the immediate aftermath of that referendum — a stronger dollar would have a debilitating effect on the world’s fifth-largest economy. The euro too would be decreased, undermining European growth. The Fed’s decision was wise and it would do well to take no action either in two months’ time.