Fed hesitation, UK politics and central bank independence

Wed Sep 16, 2015 9:37am EDT
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By Mike Dolan

LONDON (Reuters) - The era of extraordinary monetary policy and central bank dominance of macroeconomic policy may be at a critical juncture - and not just at this week's Fed meeting in Washington.

The U.S. Federal Reserve decides on Thursday whether to end its seven-year experiment with zero interest rates, having halted its money-printing 'quantitative easing' program last year.

It's a big moment for an approach to financial crisis management previously untried in modern western economies - one that overwhelmed financial markets but with no shortage of critics on all sides of the political spectrum.

For the central bank to say its economy is now strong enough to take higher borrowing rates marks a significant, if long-awaited, success for this unorthodox and controversial approach.

The U.S. recovery is real, if unspectacular. The economy is back near full employment. And fears that money printing would lead to rampant inflation have proved so wide of the mark that one of the few reasons the Fed might actually hesitate is due to lingering fear of headline deflation.

"We see a compelling case for commencing Fed action this week," said Deutsche Bank's research chief David Folkerts-Landau, citing the tight labor markets and likely rebound of temporarily depressed inflation as key reasons.

But a U.S. rate rise this week is far from assured, however, and far from the consensus view.

Powerful voices from both the World Bank to former Treasury Secretary Larry Summers say the Fed should hold off with headline inflation still near zero, the dollar rising and amid ructions on international markets.   Continued...

Federal Reserve Chair Janet Yellen attends a news conference after chairing the second day of a two-day meeting of the Federal Open Market Committee to set interest rates in Washington June 17, 2015.  REUTERS/Carlos Barria