Statements by U.S. Federal Reserve officials about the timing of next policy moves are part of the holding pattern until presidential elections on November 8. No interest rate increases are likely before then, or immediately thereafter.
The most important reason for such a turn of events is the Fed's recognition that any future monetary policy changes should be part of a medium-term (a period of one to five years) policy mix to stabilize a sharply slowing U.S. economy. The Fed knows that the halving of the economy's growth rate between the first quarter of 2015 (3.3 percent) and the second quarter of this year (1.2 percent) is one more proof that the monetary policy alone cannot carry the entire burden of the country's economic management.
The Fed has to work with the new executive and legislative authorities to stop the destruction of whatever is left of America's sluggish growth dynamics.
Foundations for better growth
Increasing investments in infrastructure, production capacities and human capital are the way forward. That has been a well-known priority during the post-crisis recovery. Unfortunately, it had to come to the grim outlook we are facing now to elevate that long-neglected task to the point of national urgency.
Here is what happened. As aggregate demand began its steady slowdown in the early months of 2015, investments – one-fifth of the economy -- followed the same pattern. But then things got much worse since the start of this year. During the second quarter, total investments declined 3.4 percent from the year earlier, and subtracted 1.68 percentage points from the GDP growth.
Investments are unlikely to rebound in the months ahead. Based on current evidence of weak aggregate demand and a strong import penetration of U.S. markets, one cannot see much need, or incentive, for increasing capital outlays over the near term.