In classical terms, the case for raising short term interest rates just is not there. Economic momentum
although positive, is running very low and US capacity to deliver goods and services is growing at a
faster rate than output. Even though business short term credit demand is increasing at a fairly strong
rate, the banking system is continuing to add to holdings of liquid assets, and there are as yet no
visible strains on banking liquidity that are typical of an economy that is starting to heat up. True
enough, inflation ex. the volatile fuels and foods sectors, has been accelerating mildly, but the full
CPI still only moved up to 1% yr/yr through Feb. '16. As the deflationary pressures from the fuels
sector subsides during the year, inflation may eventually rise toward the Fed's 'red line' of 2%, but
without sharper growth of final demand, the Fed's case for 'normalizing' short term interest rates
will remain marginal at best.
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