Reuters/Washington

The Federal Reserve’s six-week countdown to a possible December interest rate rise faces a broad range of risks as policymakers look to lift rates off the floor at a time of tepid global inflation and a potential flood of new liquidity.
Rate cuts in China and Norway, plans to expand quantitative easing in the eurozone and Sweden, and the Bank of Japan’s ongoing fight with deflation mean the Fed will face the same set of forces at its next meeting that have complicated decision making for a year.
Those include dollar gaining against other major currencies, falling import prices, and no clarity on when or if global demand and US inflation will recover in a convincing way.
For a central bank that has pledged to remain “data dependent”, the December decision may end up looking like a leap of faith - and a divisive one given an outspoken core of policymakers arguing the Fed should wait.
“Wages seem to be stuck at around 2%. You are seeing declines in commodity prices, you are seeing declines in import prices” said former Fed research director David Stockton, now at the Peterson Institute for International Economics. “It is hard to see how this is going to be an economy that could very quickly generate unwelcome inflation pressures.”
Stockton said that for the Fed policy the issue was not so much whether continued jobs growth would eventually lead to more inflation, but when this might happen.
“You just don’t know where that point is.”
Uncertainty about inflation has become the defining feature in the Fed’s debate over when to raise rates for the first time in nearly a decade and end a six-year, crisis-era experiment with near-zero rates.
Wednesday’s statement at the end of the Fed’s two-day policy meeting offered a clear line of sight to December. The Fed removed a key reference to global conditions that “may restrain economic activity,” and made a rare reference to a possible decision “at its next meeting.”
That prompted investors to shift their expectations of a December rate rise to near 50%. If that view holds, it will make the Fed’s job easier at its December 16-17 meeting by making a rate hike less likely to upset markets. Other factors may not be so helpful.
The first estimate of US third quarter economic growth was a lacklustre 1.5%, and the inflation figure most watched by the Fed remained well below target.
If job growth also ebbs in October and November as it did in September, it will make the Fed appear uncomfortably out of synch if it raises rates with no tangible progress on inflation and a slow pace of job growth.
“Weak job data would be a much more compelling reason for postponing liftoff than the weather or China,” former Fed staffer and Cornerstone Macro economist Roberto Perli wrote in an analysis of the latest Fed statement.
Perli was referring to the US economic slowdown early this year because of harsh winter and the turbulence in global markets over the summer caused by slackening growth and market volatility in China.
The Fed was actively discussing a rate hike by its June meeting, and had been expected by many to move in September until weak Chinese data raised the prospect of a global downturn.
Fed Chair Janet Yellen will get little help from her friends between now and December.
The European Central Bank in particular is expected to expand its asset buying programme and take other steps in December to try to shore up inflation and growth in the euro zone.
That is likely to feed into the familiar trends of a rising dollar, falling import prices and weak global growth outlook the Fed has been watching for over a year now and insisting at each unexpected turn that this too would pass.
The fact that the economic backdrop has not changed that much yet has prompted public calls from two board members for the Fed to hold off for now, creating a schism that could grow deeper if the data fail to move in the right direction between now and December.