In this New York Times article, author Binyamin Applebaum discusses the possibility of the gradual growth of the Federal Reserve's interest rate. The Fed's interest rate is important because it is the deciding factor of the rate at which banks can borrow money from the Fed. When the rates are higher, this means that there is concern over inflation and the board and the chairwoman, Janet Yellen, would prefer banks to borrow from each other and lend from their reserves. While, on the other hand, when the rates are lower, this means that there is less concern over inflation in the market and the fed isn't as concerned about printing more money for smaller banks when they need to fulfill their reserve requirements. This past year, the Fed has raised the interest rate due to the high economic growth and tight labor markets, they wanted to make sure that the economy did not grow excessively.
It is interesting now, however, that since the market did not do as well as originally forecasted, there has been some concern about whether the fed will stick with their original plan to continue to raise the rates. The article notes that the plans have "been delayed, not derailed." Furthermore, Applebaum takes into consideration some of the reasons for the Fed maintaining their decision to raise the rates. Some officials are concerned about a rise in the inflation rate, a rate that is supposed to hover around 2% ideally. It is noted that "Fed officials predicted in December that they would raise the benchmark
rate by about one percentage point over the course of 2016, most likely
in four quarter-point increments." Additionally, the article mentions that there is very slow wage growth occurring, and as a result, "some Fed officials see as evidence that
employers are still finding an abundance of candidates for available
jobs," which would suggest that the Fed should continue on with their official goals.
Article: http://www.nytimes.com/2016/03/14/business/economy/feds-plans-to-raise-interest-rates-are-delayed-not-derailed.html?ref=business&_r=0
It is very interesting that the Fed has delayed their plan to raise the interest rates. However, it is also interesting how they were considering to not even raise the rates due to the struggling market. Furthermore, I am pleased to hear that they will follow through with their gut decision and will slowly raise the interest rates throughout 2016.
ReplyDeleteIncreasing interest rates by the Fed would mean more people would want to increase savings by keeping money in the banks rather than spending it due to a higher rate of return. Also their will be less stimulation in the market as less people will increase investments due higher rates. This policy by the Fed may be implemented to contain the further growth of the GDP that may lead to inflation.
ReplyDeleteIt will be interesting to see how much Yellen and the Fed will raise interest rates the next time they do, seeing that their plan did not work as well as predicted. Also, I am curious to see how inflation will be effected due to the rise in interest rates because there are so many economist worried about going over the 2% target.
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