Has the Fed become hostage to inflation expectations?

Investors casting doubt on effectiveness of monetary policy

With the traditional summer lull underway and the Greek debt crisis sidelined for now, it is no surprise that US interest rate rise and its implication on currencies is again focusing investors' attention. Nearly ten years have passed since the US Federal Reserve last increased interest rates in June 2006 and nearly seven years since the onset of the 2008 financial crisis.

Since then, the economic environment in the US has improved substantially. Notwithstanding that this recovery was artificially supported by substantial asset purchases by the Fed and inequalities in US society have subsequently increased, this is no meagre achievement.  Yet through all of this, interest rates have remained at their low levels. In 2012, the Fed set an unemployment target of 6.5% in an effort to signal that interest rates would stay low for a long time. When unemployment fell through this floor in April 2014, the Fed disregarded this commitment and reaffirmed its twin mand...