The Fed’s tough task

The Federal Reserve’s pause in rate hikes appears set to break, with the American central bank widely expected to raise its policy rate by a quarter-percentage-point late on Wednesday night. Though US inflation has dropped sharply to about 3% in June from over 9% a year earlier, it still is above the Fed’s 2% target. Some market participants had been hoping the Fed would wait for past tightening to work its way into the system and drive inflation further down, but labour market wage pressures persist, and top officials have sounded hawkish in their assessments. The course ahead remains clouded with uncertainty. This is partly because several globalization factors that kept a lid on prices have either stalled or reversed, and inflation control isn’t what it was till recently. Whether this means even an average 2% aim is far too stiff has been under debate. On its part, the Fed so far has indicated it will do the job it is mandated to, even if it proves very difficult. What the US political leadership could do to help, at a pinch, would be to let an influx of immigrants shift the dynamics of America’s labour market. Keeping inflation in check will get easier if supply clamps are eased.