Yesterday, the U.S. Federal Reserve decided to keep interest rates at their current levels and postpone the predicted increase until a time at which the increase will produce more favorable results. The Fed's decision is a prudent response to the complex circumstances surrounding the United States' economy and the global economy.
Cautiously, but unmistakably, we must say this is the best decision the Federal Open Market Committee could have made, despite pressure to return interest rates to a path of growth. In short, this is because the harm caused by the increase in interest rates would be much greater than the potential benefits, the main benefit being the strict control and reduced risk of inflation. At this time, however, the risk of inflation is very low.
First, the American economic situation, the main cause of the Fed's sleeplessness, gives rise to contradictory interpretations. It is evident that the economy is expected to experience sustained growth during the upcoming trimesters, as international institutions and American banks and businesses have not ceased to emphasize this point. However, this evolution can be subscribed to at a distance.
The view is worse from a few meters off the ground. Unemployment rates have dropped but remain significantly high in some labor sectors. Furthermore, a reassuring approach for achieving full employment has not been developed. What's more, the inflation index continues to be a source of concern. The policy of massive monetary expansion has not been able to situate prices in an environment of healthy growth (two percent), which is a very strong point in favor of maintaining monetary policy at its current (exceptional) level.
It is not easy to reduce to a single formula the definitive reason that justifies Janet Yellen's decision. However, if it were to be done, it could be said that there must be an additional significant decrease in the unemployment rate for the inflation risk to justify a monetary intervention.
At the same time, the shaky evolution of the global economy is a factor that must be worrying the Fed. The Organization for Economic Cooperation and Development has offered a clear diagnosis: The eurozone is experiencing low growth – despite cheap oil and reduced interest rates – that is impeding satisfactory employment generation. China has not yet found a solution to slowing economic growth (new turbulence will probably appear in the upcoming months) and emerging countries face several trimesters of recession or insufficient growth.
In this situation, an increase in interest rates in the dollar zone would cause an outflow of capital in some emerging countries, with unpredictable consequences for financial stability in Latin America (especially Brazil) and Russia, even though the increase would probably stimulate European exports. There would be a greater risk of financial turmoil following a significant change in Washington's monetary policies. Adding up all of these factors, the Fed has decided responsibly.