By encouraging systemically important central banks to move forward with interest rate hikes, the Bank for International Settlements’ (BIS’) well-written annual report will add fuel to the growing debate about the wisdom of the Federal Reserve’s ongoing process of policy normalization.

Some have already argued that, having hiked for a second time this year and signalled its intention for another rate rise in the second half of 2017, the Fed is making a policy mistake that risks choking economic growth. Others, including the BIS, welcome the central bank’s willingness to gradually move away from too many years of exceptional monetary stimulus.

Where you come out on this debate depends primarily on the absolute and relative weights you ascribe to four main factors—all of which are subject to genuine analytical uncertainty.

. Labour market slack: The US economy has been one of the world’s most powerful engines of employment creation in recent years, adding almost 17 million jobs since the depth of the recession. In the process, the unemployment rate has fallen to 4.3%, a level that not so long ago was deemed beyond “full employment".

But not all indicators of the labour market are healthy. Wage increases have been rather muted, and notably lower than what would have been expected given realized job creation and the unemployment rate. Meanwhile, and also contrary to traditional model-based expectations, the labour participation rate declined by 0.2 percentage points last month to 62.7%, an historically low level.

While this combination leads to different views on the extent of remaining slack in the labour market, it is perhaps the least controversial of the four factors. A notable majority of analysts seems to agree that the US economy is near, if not at, full employment; and that much of the remaining labour market challenges now have an important structural component that monetary policy cannot effectively address.

2. Prospects for inflation:
Unlike the employment target, the Fed has struggled to meet the second objective of its dual mandate—the 2% inflation target. Some view the recent inflation decline as both temporary and reversible, arguing that it is just a matter of time until the 2% target is reached. As such, they are inclined to “look through" the recent data. Others feel that the recent fall in inflation may be a sign of larger problems looming, thus requiring the Fed to temper its process of monetary policy normalization.

3. Risks to future financial stability:
The dispersion in the range of views becomes even wider when it comes to the Fed’s influence on future financial stability.

Despite evidence that bouts of large financial instability can undermine the attainment of the Fed’s twin employment and inflation objectives—a point that was reiterated by New York Fed president Bill Dudley in Switzerland on Monday—some still ignore this factor in assessing the appropriate monetary policy response. This is unfortunate. But it doesn’t mean that there is agreement among those who do incorporate financial stability in their policy calculus.

Some worry that the prolonged period of ultra-loose monetary policy has not just decoupled asset prices from fundamentals, but also conditioned traders and investors to take excessive risks on the belief that central banks will always cover their backs. Others question the extent to which the Fed has “goosed" asset prices.

4. Recovering from a policy mistake:
The final area of major disagreement relates to the realm of “what if"—and, in particular, what if the Fed ends up making an inadvertent policy mistake.

The conventional view is that it is easier for the Fed to recover from the error of being too loose than being too tight. But the cost-benefit analysis changes if one of the consequences of being too loose is a bubble in financial markets that then takes on its own unsettling dynamics. Given the uncertainties surrounding these four factors—both on a standalone basis and in terms of their interaction—we should not be surprised at the extent of disagreement that currently exits.

The extent of fluidity in recent years, including the growing list of improbables that have become reality, means that policy conclusions are now more a question of judgement than the result of rigorous analytical models.

This situation requires the Fed to pursue a delicate and cautious mix of transparency, predictability and responsiveness. It must do so while continuing to urge Congress and the administration to accelerate the policy hand-off from excessive reliance on unconventional monetary measures to a more comprehensive policy response that includes pro-growth structural reforms, more responsive fiscal policy, very targeted debt reduction and greater efforts at global policy coordination.

Put me in the camp of those who, when assessing the balance among the four cited factors, feel that the Fed’s June interest rate hike was not a policy mistake, that another hike in the remainder of 2017 is warranted based on current indicators, and that policymakers should take seriously the growing risk of future financial instability, especially in the absence of a careful normalization. Bloomberg View

Mohamed A. El-Erian is a Bloomberg View columnist.

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