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The Fed is running out of room to manoeuvre

This week’s Federal Reserve meeting presents a particularly difficult set of circumstances to the Federal Open Market Committee.


PA Europe

Chair Janet Yellen and her colleagues will be wrestling more than ever with contradictory information about the strength of the domestic economy, and global economic factors.    

So far this year, the US economy has been pretty obliging to Yellen and co in that it has allowed them to persist with the stated policy of considering the state of the global economy when making their interest rate decisions.

With the US economy moving along steadily but not showing many signs of overheating, it has meant the Fed has not had to make any changes to the rate up or down to manage the domestic situation.

It has been able to look around the world and take the view that a raise in the US rate would be unhelpful in other parts of the globe without any fear that holding off would allow inflation at home to accelerate.   

Now though, there are signs emerging that the US economy is gathering steam and may need to be reined in, whether that is good for other parts of the world or not.  

The US Commerce Department said on Tuesday new home sales increased 3.5% to a seasonally adjusted annual rate of 592,000 last month, the highest since February 2008. This trounced economist estimates of 560,000.

This will of course prompt concerns about overheating of the US housing market given how the financial crisis of 2008 started. The Fed will be all too aware of the dangers that a housing bubble can bring and could feel under pressure to act.

Unemployment of sub 5% also pushes the FOMC’s hand towards the lever marked ‘rate rise’.