The federal funds rate is one of the main tools used by the Federal Reserve to either slow or stimulate the economy. For months people have been speculating on when the Fed will raise interest rates. It should be noted that this would be the first increase in 6 years due to the volatility of the market after the financial crisis. Some experts believe the increase could occur as early as June or as late as September. Janet Yellen cautions, however, that "the effects of the central bank policy can take a while to kick in and that the Fed should not wait too long before taking its first step in six years toward traditional interest rate levels".
The Fed has a current target of 5.0-5.2% unemployment and according to the March 2015 jobs report, unemployment is holding around 5.5%, so slightly higher than the Fed would like. The March job reports also showed a slowing down in growth that some experts say is a sign that the economy is still relatively weak.
There is concern that with the near-zero interest rates, "the Fed would not have its most important tool at its disposal if an economic crisis called for new stimulus. That might force it to turn to unorthodox methods."
If the somewhat worrisome March jobs report is an indication of a weak economy, it will be important for the Fed to examine their options in either raising the federal funds rate or being able to stimulate the economy using other methods should a recession or shock to the market occur in the near future.
I would agree with this article. Considering presidential election is next year and the economy is still pretty weak, the Obama admin probably doesn't want to raise interest rate.
ReplyDeleteNear-zero interest rates and the slowing of economic growth despite huge monetary policy may indicate the US is entering into a liquidity trap. A liquidity trap happens when a nation has near-zero interest rates and the monetary policy that is being used to drive the economy is no longer effective. At this point household and business confidence levels are down so they are holding on to their liquid cash instead of investing. This new March data tells me that the Fed should highly consider increasing interest rates soon and to not put it off waiting for the unemployment rate to reach 5.0%.
ReplyDeleteIs it too late though now to raise the interest rates? Should they have done this earlier? I'm interested in the timing of when this would happen, with some saying sooner and some saying later. Yellen says that the appropriate time has yet to come but there seems to be a lot of ambiguity in that "appropriate time". There's a lot of talk in the article about "waiting" and "being prepared" to implement this change, and even that it might take a long time for it to occur. So basically, my final remark or question on this article is, what's the timing like or is it just unknown?
ReplyDeleteI agree with Cameron about the ambiguity of the correct timing of when to raise the interest rate, especially considering that this has been in discussion for about a month now. The decision of raising the interest rate or keeping it at ZLB and it being based on the level of unemployment is risky in and of itself. The Fed's measurement of unemployment is not necessarily reflective of all types and levels of unemployment and job market health of the US. Furthermore, considering that the lowering the interest rate didn't cause much of an increase in investment, I would say that the Fed should be looking for alternatives to stimulating the economy besides increasing the interest rate.
ReplyDeleteWell in my opinion, the Fed should and probably will increase the interest rates very soon. The interest rates have been very low since the the financial crisis and the current economy could use a momentary policy that will stimulate the economy further via increasing the interest rates. Furthermore the unemployment is within the NAIRU range (similar to natural rate of unemployment). If unemployment drops below the NAIRU range then we could expect a rapid rise in inflation. This could cause more issues for the economy then attempting to decrease the unemployment rate.
ReplyDeleteI also agree that timing would be crucial. Curious to see if raising the interest rates will help or will it do more harm than good in the short run? Either case as our economy slowly recovers it will be important to watch over current events.
ReplyDeleteFrom what I understand from the article, I do think that increasing the interest rates would be a necessary tool to stimulate the economy. But as Yellen said, merely using the simple tools would leave out other important complexities in the given situation. I'm curious to know other possible methods and/or complexities that determines the timing of implementing a monetary policy change.
ReplyDeleteThe discussion of timing interest rate increases is interesting. It seems like it will never be the perfect time to increase rates. It's important that changes like this not be rushed, but from the article it sounds like there is more possibility for negative consequences if the wait to increase rates is prolonged too long.
ReplyDeleteAs some of you already mentioned above, it will be risky to raise interest rate now(it is too late to do so). I think that interest rates should be kept as they are for now until the economy get close to a full recovery.
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