If the Fed had to choose its poison, it'd be stagnation over inflation

THE question before the US Federal Reserve as it hunkers down at its annual retreat at Jackson Hole, Wyoming, is whether the time has come for another round of interest rate hikes.

There is no obvious answer, but when all things are considered, the balance of risks suggests that the Fed should hold rates unchanged and steady for now. The decision was easier to make when the world was still deep in the abyss of the global financial crisis. Deflation was the disaster around the corner, and fearful markets and consumers desperately needed jolts of stimulus. The question from 2008 to 2012 was not whether to be accommodative, but which policy tools would be most accommodative.

Circumstances have changed quite a bit since. Making the case for a more hawkish stance is the fact that unemployment and inflation are close to the Fed's targets. The Fed, whose mandate is to maintain maximum employment and inflation at 2 per cent, also expects economic growth to pick up from the second-quarter annualised rate of 1.2 per cent.