Amidst the looming debate whether the US Federal Reserve will finally take the call and raise the benchmark interest rates, for the first time since 2008, leading investment bank Goldman Sachs has predicted that at least four interest rate hikes can be expected in 2016. This is double the expectation already evinced by the Wall Street.

In its Dec. 17 meeting, the central bank is expected to raise the interest rate of short-term fed funds. If that happens, that will be the first ever increase in a decade. However, available indications from bond-market suggest that only a marginal hike of 50 basis points will be happening.

According to two senior economists, Goldman asserted that the Fed will boost rates by one per cent in 2016 and based their forecast on the probability of the US growing faster and forcing Fed to raise rates average once a quarter.

It sees a plethora of factors such as tight labor market, steady consumer spending, stronger home sales and construction to be driving the economic action, abetted by increased government outlays, reports Market Watch.

Tortoise recovery

“We now expect the economy to reach full employment over the next year — the ‘tortoise recovery’ will soon cross the finish line,” wrote economists Jan Hatzius and Zach Pandl.

The analysts noted the last time the fed funds rate stood at one per cent was in early 2008, and that too very briefly, as the central bank slashed short-term rates to near zero in order to shore up the bruised economy that was wallowing in recession.

Acknowledging that the forecast will be a bit of overshooting, the economists also flagged some setbacks that will accompany rate hikes. They said hiked rates could freeze out the recovery in the housing market as the cost of mortgages will go up, at a time the prices are flaring up. Given that many consumer loans are tied to the fed funds rates, the sale of autos and appliances will be negatively affected.

Income inequality

Meanwhile, advocates of the interest rate hike are pointing to the widening income inequality in the United States that is being indirectly helped by the Federal Reserve's monetary policy of near-zero short-term interest rates. Though no correlation between zero rates and rising inequality is established, the argument is that such a correlation cannot be ruled out, said an article in the US News.

The point is -- mandated near-zero rates are boosting the share of profits in national income with such profits flowing into the coffers of the rich in the high-income brackets and thereby widening the inequality automatically.

The epicenter of such a disparity is pre-tax income. In the US, the 1980s had the top one per cent of the wealthy having a share of US pretax income at eight per cent. By 2014, that share has almost trebled to 21 per cent.

Gini coefficient

The article said the main tool for measuring inequality is Gini coefficient, which in the US has shown a growth of 30 per cent during that period. The Gini coefficient is now at mid-range, between 0.41 and 0.45.When that touches one, there will be extreme inequality and when it is at zero, it spells minimum inequality.

The pretax inequality is driven by many social trends such as family structure, parenting, neighborhood effects, access to quality education, immigration, use of information technology and innovations.

The article argues that the accelerator effect of the Fed's mandated near-zero short-term interest rates has helped many lobbies to make more wealth. They include debtors, creditors, high spending consumers and companies of all sizes. It cautions that time has come for a rethink on the prolonged low rates that has widened income inequality and brought in many ill effects to the society.

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