The Fed should not hold off raising interest rates for long

THE US central bank's Federal Open Market Committee (FOMC) meets next week to decide if a second interest-rate hike in six months is warranted. Markets are unsure if the Federal Reserve will act - in the federal funds futures market, the implied probability of higher rates at the upcoming FOMC meeting is currently 22 per cent, though this rises to 53 per cent for July's FOMC meeting.

Fed officials in the meantime have hinted in their public comments over the past fortnight that there is a strong case for higher rates this year, though no specific timing has been mentioned.

Should the Fed act next week? Yes - it is now eight years since the US sub-prime crisis, an abnormally long period to keep interest rates artificially depressed. Combined with inordinately large monetary injections, zero interest rates for so long have prompted capital markets to exhibit anomalous behaviour such as embracing bad economic news as being good for risk assets and allocating funds to where the stimulus is greatest instead of to their best economic uses.