http://www.cnbc.com/id/102050278?__source=yahoo%7Cfinance%7Cheadline%7Cheadline%7Cstory&par=yahoo&doc=102050278
From attacking both unemployment and inflation, Fed now changes its goal into maximize employment. Just from the October meeting, Fed decides to raise interest rate, just because they based on "nebulous data". It will end the bond-buying program. Stanley Fisher said that this approach is dangerous and can get us into problems. Central bank doesn't want to increase interest rate even when unemployment rate is lower than 6.5%. There is also news that members of FOMC Dallas Fisher and Plosser will leave the Fed, make Obama chance to promote 2 new people into the Fed to make interest rate lower for longer.
We haven't deal with unemployment enough. It is true that unemployment rate is lower than 6.5%, it is not natural rate of unemployment (5%) yet. Also, we still have structural unemployment. That needs Fed to deal with it. By raising employment, why did the Fed raise the interest rate? If inflation rate is now 2%, why raise interest rate?
If the Fed raises interest rates that will lead to a decrease in expected inflation. However, the inflation rate is right where the Fed wants it to be. The nominal interest rate, or cost of holding money will also decrease as a result. Some price levels may fall due to the raise in interest. Also, an increase in interest rate will lower consumption and investment because the cost of borrowing has increased.
ReplyDeleteIt will be interesting to see how the economy responds to higher interest rates. I agree with Sean that consumption will decrease since many people finance large purchases such as cars or houses, and higher interest rates will deter people from doing so.
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