All eyes are on the Federal Reserve and chair Janet Yellen, ahead of a meeting of the central bank on September 16-17 where it may take the decision to raise interest rates for the first time since June 2006. Rates were raised to 5.25% in 2006, but soon afterwards the financial crash happened and the Fed was forced to do an about-face. Since December 2008, rates have been set at 0-0.25%. The bank targets inflation of around 2% and has traditionally achieved this by increasing or reducing its benchmark interest rate. However, since the housing bubble burst and the recession began, the bank has been forced to keep rates low and stimulate investment through alternative means such as purchasing government bonds.
So far, Yellen is keeping her cards close to her chest about what the bank intends to do at its September meeting. Some analysts think the recent China collapse will provoke the bank to put off its rates rise once again, to December, while others – including The Economist – think the bank will stick with its plan to hike rates. Yellen said in a March speech that she would be “uncomfortable” with raising rates if wage growth or inflation weakened, but also spoke of the dangers of waiting too long.
A rates increase would be a signal to some that the US is out of a crisis, but acting too soon could turn low inflation into deflation. The U.S. does currently have low unemployment, but growth is still very modest. The global picture is also not looking good – China’s slowdown has had a ripple effect on already weak Latin American economies, and has impacted many other global markets.
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