Needless to say, the Fed will pay a lot of attention to forthcoming economic numbers including, of course, the November employment report that will be released in a month’s time. Although the numbers are unlikely to be as strong as the October figures, they probably will reinforce perceptions that the U.S. economy continues to heal.
The only thing that would stop the Fed from raising now is a return to the August turmoil in international financial conditions, particularly due to developments in emerging economies and patchy market liquidity. This is certainly a risk given that growth in the emerging world continues to slow, that pockets of financial excesses there have yet to be sufficiently addressed and that broker-dealers continue to seek to reduce their exposure to risk, lowering market liquidity.
While the Fed isn't as influential in emerging economies as it is here, it isn't powerless. What it needs to do is consistent with the communication challenge that faces it domestically — that is, do more of what Fed Chair Janet Yellen did earlier this week.
Other Fed officials need to add their voices to Yellen’s in
re-affirming that what matters for the U.S. economy and markets
(and, therefore, for the global system as a whole) isn't when
the Fed hikes first but where it will stop the cycle and how it
will get there.
This message — that the coming cycle of rate increases would be
the loosest tightening in the modern history of the Fed — needs
to be repeated over and over in the next six weeks.
It must do this not only to prepare markets and companies,
thereby lowering the risk of undue financial volatility and
economic damage here, but also to reduce the chance that any
international turmoil spills back to the U.S. economy.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story: Mohamed A. El-Erian at melerian@bloomberg.net