We might be close to a rate hike by the Fed...

This time, too, the pace of speculation about the outcome of the Fed’s monetary-policy review has gathered momentum as we approach close to the date and the real picture of the economy shows the data showed improvement in the second half of May and in June after worsening in the first half of May. The unemployment rate has reached 4.7% in June after increase in the jobless claims rate in May’s first half, but has shown improvement in the latter period till June. The growth rate has also shown an improvement of 0.8% in the recent data. The increase in wages and incomes, and consumer spending is also shooting at a healthier pace and the real-estate has also felt improvement in the growth. This all tells a story that the data might underline the Fed confidence in the economy that it is now ready for a second rate hike after six-months and that the economy might avert a future spike in the inflation rate by acting before time. However, it is still unclear how the Fed may know when the inflation is coming exactly when it is still showing a subdued figure and there is a global deflation in the commodity prices. A strong dollar shows that price-level has a downward bias and inflation and depreciation may not increase the competitiveness and exports which has deteriorated the trade-deficit in the recent months. However, a slow rate hike trajectory might not affect the dollars competitiveness much when most of the American companies are exports oriented which is also good for demand and the growth-rate of the economy. The Fed should recall that the rate hike expectation last time lowered the economic-activity and growth when there was unclarity on the possible rate hikes, but when the Fed clarified that the rate hikes would be slow and gradual the markets became more confident. The Fed might communicate that if inflation increases then only it would increase rates and not in the expectation of inflation which would link rate hike expectation with inflation and people might spend more on the expectation of lower inflation and interest rates based on the current inflation. The Fed may help increase spending, consumption and investment, by discouraging savings, encouraging consumption and investment by adopting a very slow interest-rate trajectory, probably a 25 basis points every two quarters or six months or more delayed. If the Fed hikes by 25 basis points every 6-8 months with stable inflation or upward bias it might help increase spending further helping us achieve the inflation target in the future.