Credibility, 'gradual' approach at stake as Fed weighs rate rise

Mon Sep 14, 2015 2:41pm EDT
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By Jonathan Spicer and Ann Saphir

NEW YORK/SAN FRANCISCO (Reuters) - The U.S. Federal Reserve, facing this week its biggest policy decision yet under Chair Janet Yellen, puts its credibility on the line regardless of whether it waits or raises interest rates for the first time in nearly a decade.

In a way it is a "damned if you do, damned if you don't" situation for the Fed despite months of fine-tuning its message, dissecting economic data, and carefully building a consensus around the idea of a cautious and gradual "lift-off" from near zero rates towards levels it considers normal.

A chorus of prominent detractors, including former U.S. Treasury Secretary Lawrence Summers, argues raising rates now would be wrong given market turmoil caused by worries about China's economic health and global growth, and the absence of inflation risks at home.

Others say the central bank's credibility will suffer if it delays the long-telegraphed move and prolongs investors' guessing game about the timing of the lift-off.

The central bank, for its part, has left the door open to a modest rate rise on Thursday, following a two-day meeting. Recent comments by Fed officials suggest it will try to comfort investors with pledges that whatever it decides it will keep nurturing the economic recovery.

"The Fed is anxious to get started," said Scott Minerd, chief investment officer at Guggenheim Partners, in Los Angeles. "If it were to move I think it would go out of its way to say ... there's no rush to do anything else," he said.

"If it doesn't, it will refer to the market turmoil, and say that ... a rate increase is inevitable."

Restoring some clarity about the Fed's intentions will not be easy given how wide apart economists and investors are right now.   Continued...

The United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron