What should the Fed do? Three views
Martin Wolf: The case for keeping US interest rates low
[The BIS] believes that monetary policy should be targeted not at equilibrium in the real economy, but at equilibrium in the financial sector. Thus, one should be prepared to tolerate prolonged cyclical unemployment over the medium term, in order to prevent a build-up of damaging financial excesses over the longer term. This raises two big questions. First, does anybody know what monetary policy would stabilise our financial casino? Second, what is the point of a deregulated financial system that creates such profound dilemmas? It surely makes better sense to cage it, instead.
... central banks should continue to focus on stabilising the real economy, though more needs to be done to curb financial excesses.
Lawrence Summers: Further thoughts on US monetary policy
The essay has five parts, all worth reading. There is the natural point about inflation:
the case for concern about inflation breaking out is very weak. Market based expectations suggest that inflation over the next decade on the Fed’s preferred core pce basis is near record lows and well below 2 percent.
On the value of linking decisions to data, Summers writes:
In a highly uncertain world, the Fed cannot be both data dependent and predictable with respect to its future actions. Much better that it stick with data dependence than that it put its credibility at risk by seeking to mitigate a current rash action by trying to reassure with respect to future steps.
I understand the argument that zero rates are a sign of pathology and the economy is no longer diseased so policy makers have to increase rates. The problem is that the case for hitting the brakes in an economy with sub target inflation employment and output is not there regardless of whether the brakes are to going to be pressed hard or softly, singly or multiple times.
I believe that conventional wisdom substantially underestimates the risks in the current moment. ...
... We know that the world’s largest economy, China, is in its most uncertain state since it began economic reform in 1979 and may well be experiencing a larger volume of capital flight than any economy in history.
Reuters; World to Fed: We're prepared for U.S. rate hike, so don't delay
The headline is misleading, of course: not all central bankers (and certainly not all parts of "the world") are pressuring the Fed to act. But the article contains some telling quotes:
"It's a long anticipated event," Reserve Bank of India Governor Raghuram Rajan said on a conference panel, sitting alongside Fed Vice Chairman Stanley Fischer. "It has to happen some time - everybody knows it has to happen - but pick your time."
Those comments were supported by central bankers from Japan, South Korea and Indonesia. When asked earlier this month whether he thought the Fed should hike in September, Bank Indonesia Senior Deputy Governor Mirza Adityaswara told Reuters in Jakarta: "The more certainty there is, the better."
A senior South Korean policymaker echoed that sentiment.
"A lift at an already expected timing would be better in a sense that it clears up one of the big uncertainties over the issue and it would mean the U.S. economic recovery is deemed sustainable," he said ...