According to the NY Times, The Feds meeting this week can be viewed two different ways. Both cases are extremely reasonable when it comes to the state of our economy, and the direction it could go.
As we know, unemployment is extremely low at 4.3%. Which in most cases should drive up wages and prices. More people are making money, so goods would become more expensive. At this point, most assume that inflation will rise again simply because of the rising product prices and higher wages. Inflation would follow suit of the low unemployment rate and its affects on wages/prices.
The second and final thought is quite simple. Since interest rates are so low, the economy may be more fragile than some want to admit, and in the end the inflation rates must be helped.
In recent times, the Fed has pulled back from inflation projections and may need to do so in this case. Considering pay raises have been rare and Core Inflation has fallen short of the Fed's 2%.
Although the Fed doesnt control it all, better drug treatment, sentencing reform and health care could all help in all of this. They also cannot help control emigration to combat an aging labor force.
https://www.nytimes.com/2017/08/22/opinion/fed-inflation-interest-rates-workers.html?rref=collection%2Ftimestopic%2FInterest%20Rates&action=click&contentCollection=timestopics®ion=stream&module=stream_unit&version=latest&contentPlacement=2&pgtype=collection
One other reason the US Federal Reserve may not raise interest rates this week is that there are concerns about political and other risks to the US economy. There are also worries about whether financial stability is in danger if the Trump government decides to back away from the bank regulations the Obama government put in place after the global financial crisis.
ReplyDeletePlus article this comment drew on: https://www.economist.com/news/leaders/21727066-chinas-central-bank-has-more-cause-worry-fed-or-ecb-financial-stability
DeleteSince last November the Federal Reserve has been alternating between raising the Federal Funds Rate and keeping the Federal Funds Rate stable. Specifically with rate hikes occuring in Dec '16, March '17, and June '17 and rates being maintained at meetings in Nov. '16, Jan/Feb '17, May '17, and July '17. This pattern would seem to suggest that at the Fed's September meeting the Federal Funds Rate. However, the Federal Reserve announced in June that it would begin decreasing the size of its balance sheet, thus leading to more agency debt and US Treasuries and less capital existing in the open market. This further tightening action may lead the FED to relax the agressiveness with which it was previously raising rates. This may mean that rates won't be raised until December or perhaps even 2018.
ReplyDeleteIn one way, it could make sense for the Federal Reserve to raise interest rates this month (according to an article in The Economist: https://www.economist.com/news/leaders/21727066-chinas-central-bank-has-more-cause-worry-fed-or-ecb-financial-stability). The US economy is growing at record rate. But The Economist writers agree that the Federal Reserve and other central banks have a good reason to worry about financial stability. So I agree with the last post that rates may not rise for several months because there is growing fear of increased financial instability in the US and some other large economies such as China.
ReplyDeleteAll are more than fair reasons as to whatever option the FED will decide. Past decisions definitely create a pattern and allow fair judgment on future FED decisions. Inevitably they will focus on what is necessary for the US Economy now, and its affects in the future.
ReplyDeleteAnother reason that the FED could be so scared by the inflation is that it lowers the value of the dollar. As much as inflation is needed for the economy, it could also hurt it because the value of the dollar has decreased even below the euro now. Although the FED is scared of inflation, though, it is necessary in the economy.
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