Fed, seeking to leave zero behind, grapples with Catch-22

Aug 20 (Reuters) – If we define a “Catch-22? as being in
need of something that you can only get by not being in need of
it, then the Federal Reserve, mulling a rate hike off the zero
lower bound in September, is kind of caught.

The minutes from the July meeting of the Federal Open Market
Committee, besides showing a genuine split about when to proceed
with the first interest rate hike since 2006, also betrayed
nervousness over the limitations it faces given unprecedentedly
low official interest rates.

Check out this puzzler of a passage from the minutes:
“Another concern related to the risk of premature policy
tightening was the limited ability of monetary policy to offset
downside shocks to inflation and economic activity when the
federal funds rate was near its effective lower bound.” (here)

In other words, if we tighten from interest rates of
virtually zero to just a bit higher we still have insufficient
room to cut if it all goes wrong. This rather implies that the
Fed is well aware that, as in the old story, given where they
want to end up, they shouldn’t be starting where they are.

On that logic, the Fed might never be able to tighten, as
whenever it wrenches interest rates to 25 or 50 basis points
above zero, it would still lack ammunition.

cont'd
http://blogs.reuters.com/james-saft/2015/08/20/fed-seeking-to-leave-zero-behind-grapples-with-catch-22-james-saft/