Job gains, low inflation pose dilemma for Fed’s interest rate rise

Recent mixed economic reports have highlighted a policy dilemma for U.S. Federal Reserve officials as they debate whether to raise interest rates for the first time in nearly a decade at its policy meeting later this month.

During a panel discussion about the Fed’s monetary policy at the Brookings Institution, former Fed vice chairman Donald Kohn said that the fact that inflation hasn’t risen and wage gains haven’t picked up do make him hesitate a little bit to move interest rates sooner rather than later.

Kohn added that the recent turbulence in global financial markets and the slowdown in emerging market economies also made the Fed less likely to raise interest rates in September.

Jon Faust, professor of economics at Johns Hopkins University and former special adviser to the Fed’s board of governors, said that this volatility has indicated a fundamentally weaker economy, so he can’t have confidence that the inflation is going to return to the target.

In Faust’s views, Fed officials will also debate whether the labor market will continue to improve to give them confidence that inflation will move back to 2 percent.

The Institute of International Finance, a leading global association of about 500 financial institutions, has shifted its expectation for Fed’s interest rate rise to the fourth quarter of the year.

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