Sunday, February 21, 2010
The Fed's great rate debate
Federal Reserve Bank's decision to increase the interest rate has caused many arguments in policymakers. Since december 2008 the federal fund's rate was 0%, this was obviously done to encourage the bank's to borrow from the federal reserve. But the sudden move to increase the rate to 0.75% is still not justified. May be the decision was taken to show people that America is no longer in economic hard time and it is the time to move on. The effectiveness of the decision can't be judged until we see the effects. Hope people find this article useful in keeping track of the on going economic trend.
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Increasing the ffr seems to be more of a political move rather than an economic one because the Fed is attempting to signal to the nation that the economy is in recovery and thus banks are willing to loan to one another now. At a rate of 0.75%, the ffr is now equal to the discount rate which implies that financial institutions have regained the confidence to release some of their reserves. I am unsure whether this will work because of the low confidence among financial institutions.
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