Ahead of the next meeting of the Fed's Open Market Committee (FOMC) on September 20-21, an UNCTAD Director says US interest rates should be raised in a more favourable economic environment.
Ahead of the next meeting of the Fed's Open Market Committee (FOMC) on September 20-21, Richard Kozul-Wright, Director of UNCTAD's Division on Globalization and Development Strategies, said:
Monetary policy has reached its limits in supporting a lasting economic recovery. What is required is a lead role for expansive fiscal policy.
Recent unorthodox monetary policies, including large asset purchasing programs and negative interest rates in some countries, have not only failed to revive real investment and job creation in the US and other advanced economies. They have fueled financial speculation and bubbles, reinforced income inequalities and indirectly promoted jobless growth at home and in many developing countries.
But a hike in the Fed policy interest rate is the wrong way to initiate a return to 'normalcy' in policy terms. All this will achieve is a deepening of already negative net capital flows to emerging market economies and other developing countries, accompanied by an inevitable appreciation of the dollar. This will not help manufacturing investment in the US. Rather, it will likely entail a further distortion of financial asset prices, and expose emerging and developing countries to growing vulnerabilities in the management of their debt burdens.
As we will say in this year's 2016 Trade and Development Report, to be released on September 21st, supportive fiscal policies and stable exchange rates are paramount to create steady but expansionary economic conditions, in advanced and developing countries alike. This will boost aggregate demand, ensure high levels of investment, for example in low carbon infrastructure, reduce inequality and ensure an environment in which economic diversification in developing countries can flourish.
An eventual rise in the Fed policy interest rate should take place in a much more favorable economic environment. Over-burdening monetary policy with leading the recovery and stabilizing an unstable global economy is futile.
