Amidst high inflation and a strong job market, it is being predicted that at their meeting in March, Federal Reserve will agree to increase interest rates.
As the pandemic winds down (hopefully), it is evident that it has had many effects on the nation's economy. The government has put lots of funds into supporting markets in order to keep them afloat in these trying times. However, "rapid wage growth" and the increase in prices of, well, everything is not something that the country can maintain in the long run of the economy.
Interest rates reached almost 0% during the pandemic, stimulating the economy greatly. People and businesses were taking out loans that they had to practically pay nothing for. Jerome H. Powell, in a conference, acknowledges that all of these monetary policies moves worked and did what they were supposed to do. However, it is now time to somewhat return to normal, especially with the great amount of inflation that we are experiencing.
Also in his conference, Howard Schneider questions Powell on Fed's plan regarding benchmarks of inflation; how rapidly will it occur and how much should people expect rates to go up by and when. Powell did not have a response, and says that Fed will not have that response until they convene to discuss the interest rate increase in their meeting in March. This is definitely going to be frustrating for many people and businesses throughout the US. March seems like quite some time away, however uncertainty is never a comfortable feeling, especially when it comes to the future of your money and how you will have to spend it.
Craig Torres then asks the obvious: what are the risks? Powell's first response is that there is always the risk that inflation will continue and move even higher. On the other side, Powell acknowledges that the pandemic is not over, in fact there is a possibility that it can get bad again. In that case, if there are more shutdowns with high interest rates, it will be difficult for business to stay afloat if loans are expensive to attain.
The major take away from this conference is that the raising of interest rates and what will come of it is going to be a long run game, however frustrating that is. There is quite a bit of uncertainty and Americans are going to have no choice but to trust Monetary Policy to achieve its goals in the long run. We do know one thing: we cannot live in a pandemic-ridden economy forever, and Fed is going to do all they can to balance it out for us in the future.
Smialek, J (2022, January 26). The Fed, citing high inflation and a strong job market, signals rate increase
'soon'. Daily Business Briefing. https://www.nytimes.com/live/2022/01/26/business/fed-rate-decision-
stocks-inflation
While I think that Powell should have been more forward about the Fed's desire to raise rates, there's something to be said about warning investors, banks, and businesses about the plan to do so officially before the policy is implemented. The last thing we need right now are sudden shifts in Federal Reserve policy while we're dealing with a still recovering economy. Something else to note is the likelihood of additional fiscal policy should we face another Omicron style wave that starts to shut things back down. Powell is right, I think, to be concerned about high interest rates should not also be followed by stimulus; this was his position at the start of the pandemic, and likely remains so.
ReplyDeleteIncreasing interest rates will slow down business activity which should in turn reduce inflation to some extent. I can see why the Fed would want to increase the interest rates as it is one of their goals to keep inflation in check. As the economy is currently doing well and recovering from the pandemic, this may not slow down the recovery as people believe it might. The government has used fiscal policy by giving out several stimulus to the population which has led to inflation to go over the ideal percentage. Therefore, it is natural that the Fed would want to initiate a monetary policy that reduces inflation.
ReplyDeleteI think that the Fed must be very careful when it comes to increasing the interest rates. I believe that if they take a gradual approach in doing so it will help counter inflation while still encouraging economic growth. I agree that there is concern with potential future lockdowns and the negative effect they will have on small businesses, this is why I think it will be best to take a gradual approach in increasing interest rates.
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