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US Fed seems set to raise interest rates despite sluggish data

WASHINGTON: For the second time this year, the US central bank appears poised to raise interest rates despite fresh signs that 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 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 the 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 per cent and 1 per cent, and policymakers said they would wait to see whether evidence supported another rate hike.

But they also said the 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 that they are not basing decisions on the data, as they had pledged to do.

"They seem to be more committed to just getting back to some version of normal than following the numbers," said Mr Jared Bernstein, economic advisor to former vice-president Joe Biden.

"It is a little puzzling since chair (Janet) Yellen and others have said they are going to be data-dependent."

Since the Fed meeting last month, the picture has not grown much brighter, especially in the key areas the central bank watches - employment and inflation.

Government data has shown clear signs of flagging job growth and a shrinking work force, with average job creation in the March-May period down 40 per cent from the prior three months.

Inflation moved even further from the Fed's 2 per cent target in April, with the Fed's preferred inflation measure at 1.7 per cent 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 per cent, it is still no better than sluggish.

Given the weak data, the Fed's persistent belief that inflation will stabilise at 2 per cent in the medium term has drawn sharp criticism from some quarters.

Economists J. Bradford DeLong said the Fed has overestimated the economy for 11 years in a row, making them less reliable than a coin toss.

Even with the growing doubts, as of Friday, futures markets were still forecasting a better-than-99-percent chance of an increase at this week's Fed meeting. But they are now evenly split on the prospects for another rate increase by the end of the year.

Some economists, however, said the economy can tolerate higher rates, as they remain low by historical standards.

Mr Bernstein said that raising for the sake of raising, or to avoid having to cut rates too suddenly down the road, is not justified.

"You are either data-driven or you are not. You either have evidence of price pressures or you do not," he said.

"These rate hikes are not costless. Working people need a hot economy if they are going to get ahead, and so tapping the breaks does not help them." - AFP

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