Deflation risks suggest Fed should hold off on interest rate hikes till 2016

ON Sept 16, the Federal Open Market Committee (FOMC) of the US Federal Reserve will meet to decide whether it should increase the benchmark Fed Funds rate for the first time since 2006.

Expectations have been running high that the Fed will finally act. But recent economic and market developments suggest that it should hold off, at least until 2016.

The case for a rate hike has been well articulated. It is suggested that the US economy is in recovery mode. Unemployment - which the Fed said it considered to be one key indicator that will determine the timing of a rate increase - is running at 5.3 per cent, the lowest since April 2008. Economists also point out that the Fed had signalled that it would tighten monetary policy around mid-2015 when, in its December 2014 meeting, it dropped its earlier forecast that it would keep interest rates low "for a considerable time". Those who favour early rate hikes also suggest that the Fed should be guided not by developments in st…