The Fed may wait for overheating...

The Fed in the US is set to manage the point of view that the economy is on a strong foot to weather a gradual rate hike in the occasion of a strengthened labor market and Core-inflation near the Fed’s target of 2% inflation. The unemployment in the country is 4.9 is close to the NAIRU when inflation is low and stable and expectations of low inflation have put a downward pressure on the long-run rates and also on the short-run rates when the interest rate expectation are biased lower which might increase spending, but the Fed is in hurry to hike rates in the expectation of overheating which is yet to show-up in the inflation numbers through wage hikes when some sectors like construction is facing shortage of labor due to full-employment. It is true that the economy might be close to maximum employment and low and stable inflation, but the growth-rate is slower than the potential which is around 5% depending on the population growth rate of 10% after accounting for 5% frictional-unemployment. The expectations of higher inflation in the future have made the Fed follow a hawkish stance in the hindsight of an overheating economy that may trigger rate hikes and a slowdown or recession due to higher interest rates. The economists are aware that rate-hike might result in recession or down-cycle. During rate hike cycle the economy tries to pay its debt soon and avoid more debt and a rate cut or lose money-policy would boost demand for debt and increase spending – consumption and investment. Therefore, the Fed can not commit rate-hikes and higher growth rate at the same time, a rate hike would lower demand and growth and inflation in the economy.  This means the Fed’s monetary-policy would itself start the next recession and the gradual rate hikes might only delay it. Up-cycle or boom starts with rate-cuts and down-cycle or recession follows the rate-hikes, monetary-policy or credit-policy is responsible for trade-cycle. The rate-hike to control inflation before it surfaces the data might start the next recession soon. However, the natural real interest for the economy is also close to zero.