There are many factors that the Fed looks at to determine interest rates based on expected inflation. Janet Yellen, current chair of the Federal Reserve recently made a statement claiming her, and the rest of her colleagues at the Fed misjudged the rate at which inflation was rising, likely also causing an unnecessary increase in interest rates in the country. Following the belief of hitting 2% inflation, the Fed raised interest rates to 1.25%.
Yellen provides a few reasons as to why inflation may not be on the rise as anticipated. A few of these might be "a labor market that may not be as tight as it appears; weak long-running inflation expectations by investors, employers and consumers; and factors such as discounted online shopping." While these are only possible factors, they do appear to have had an effect on the interest rates today. Will the Fed be in a position of scrutiny from their mistake? At best, the Fed will hold of on rising the interest rate when the time comes to counter their mistake of rising the rates the most recent time. Will the Fed be able to predict inflation accurately in the future considering their miscalculation the time around? The Fed will use everything in its power to determine an accurate estimate for inflation, using its miscalculations to help its future predictions.
Link:
https://www.usatoday.com/story/money/2017/09/26/yellen-fed-may-have-misjudged-inflation-keeping-rates-lower/703920001/
This mistake is not catastrophic to our economy. The extremely educated board at the Fed expected inflation to increase, and then it didn't. Id rather be in this situation, then believing inflation won't move, but finding it jumping tremendously. Their credibility could be questioned, for lack of better words, their mistake is not nearly as bad as it could've been. When they gather again to talk about interest rates, they will be more informed on inflation and make changes accordingly.
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ReplyDeleteOne reason Yellen defended her decision to keep raising rates is because interest rate changes (monetary policy) work with a lag. Even if inflation is not yet high, she believes inflation will increase in future and monetary policy needs to be in the right place when it does. Yellen recently said the US labor market is in a "Goldilocks moment"--neither too limited supply nor oversupply. But she believes that this moment will not last and the labor market will face more shortages.
ReplyDeletehttps://www.nytimes.com/2017/09/26/us/politics/janet-yellen-fed-interest-rates-inflation.html?mcubz=0