The Federal Reserve weighs in again this week on the price of money. Functionally, nothing’s changed. It’s just one more summit on engineering an interest rate that a select group of Fed officials see as optimal. But measured by the context of the current global economy, the stakes in this week’s decision on the Fed funds rate are higher than before. In fact, that progression of an ascending ante promises (threatens?) to hold fast for the foreseeable future FOMC confabs.
For the one that arrives on this Wednesday and Thursday, the pressing question turns on where to err? On one side is the preference for nipping inflation’s momentum of late by elevating interest rates yet again, and thereby risking an economic slowdown of greater magnitude than would otherwise unfold. The alternative (which still appears out of favor but nonetheless within the realm of possibility) favors growth by keeping Fed funds at the current 5.0%. In theory, a third choice beckons: cutting rates, but almost no one believes this one’s a viable choice at the moment.
Deciding where the path of greatest prudence (or minimal recklessness) lies rests largely on how one sees or ignores the risks that lurk in the global economy. The Bank for International Settlements (the so-called central bank for central banks) last week handicapped the future on this score by opining that “the best bet for next year is that strong, non-inflationary growth will continue,” according to the new annual report for BIS. If so, the Fed’s job will be infinitely easier by widening the margin for error considerably in matters of monetary policy.
But even an optimistic take on what comes next shouldn’t ignore what might go wrong, and the new BIS publication lays out the range of possibilities with clarity. Summarizing the yin and yang of outcomes that may arrive in global economics boils down to the BIS advisory “there are considerable uncertainties and associated risks, not least concerning inflationary pressures on the one hand, and a possible unwinding of accumulated economic and financial imbalances on the other.”