On US Interest Rates

The first US interest rate increase since June 2006 is a pivotal moment for the global economy, launching what Mohamed El-Erian, Chief Economic Adviser at Allianz, calls the “great policy divergence,” with repercussions in every region and financial market. The impact will be particularly powerful in emerging countries, where currencies are vulnerable to a rising dollar and tightening liquidity conditions in the US. Project Syndicate’s commentators – some of the world’s preeminent economists and policymakers – have examined the issue from four broad angles.

What is the immediate and longer-term outlook for US monetary policy?

The Fed’s leaders have repeatedly said that they plan to raise interest rates much more slowly than in previous periods of monetary tightening. Such assurances from central bankers cannot always be trusted, but Fed Chair Janet Yellen’s promises to move more gradually than in the past are credible, because the Fed is genuinely determined to push inflation higher and to ensure that it never again falls much below 2%.

Nobel laureate Joseph Stiglitz provides further grounds for discounting the likelihood of faster tightening. Instead of trying to control inflation, according to Stiglitz, the Fed’s main concern now is to reduce unemployment and counteract inequality. To do this, the Fed must continue to stimulate the US economy with easy money. Even the quarter-point rate hike that the Fed’s just announced is, in Stiglitz’s view, dangerous and premature.