http://www.cnbc.com/id/102040309#.
Chicago Federal Reserve President Charles Evans told CNBC that he believes it will be "quite some time" before it is appropriate to begin to raise interest rates.
Evans hinted that June could be the first rate increase, but continued to say that if it were his decision, he would wait longer due to how difficult it is for an economy to come out of near-zero rates.
Evans is confident that the economy is getting stronger but before raising rates, he wants to see inflation reach the targeted 2% that we discussed in class. The targeted 2% would help boost jobs.
Evans also claims that the US, even through a higher funds rate policy, cannot engineer a way to increase the low interest rates around the world.
As we discussed in class, once people begin to expect a higher rate of inflation, interest rates will increase, money demand will decrease, and prices will increase in order to re-establish an equilibrium in the market. I think it will be interesting to see when that expectation of a higher rate of inflation actually does occur.
Janet Yellen is faced with a daunting task; her challenge will be deciding not when to raise interest rates, but rather how. The Fed’s old system, appearing increasing ill-fit for the post-crisis financial system, seems to demand a new strategy. In the past, the central bank changed the Feds Fund Rate by increasing or decreasing reserves. Following the 2008 recession and implementation of the zero interest-rate policy, Fed officials still intended to remove these reserves when they wanted to increase interest rates. In the post-Great Recession world, however, there are simply too many reserves to quickly remove. To address this new reality, the Fed is experimenting with overnight reverse repurchase agreements, paying interest to nonbank entities.
ReplyDeleteRaising rates would be almost impossible to do to reach the feds goal. They want inflation not the opposite. They want people to borrow more to spend more to get the economy up to speed again with everyone going out and spending money. IT would be difficult due to how many reserves there are and to move that fast.
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