The Federal Reserve sent a sharp, simple message to financial markets on Wednesday: Pay attention. The Fed is thinking seriously about raising its benchmark interest rate at its next meeting, in June.
That message was sharply at odds with the expectations of investors, who had largely written off a June increase before Wednesday, betting instead that the Fed would leave rates unchanged until later in the year. Measures calculated from asset prices suggested that investors saw less than a 5 percent chance of a June increase at the beginning of the week; by the end of Wednesday, that had spiked above 30 percent.
The Fed, which entered the year predicting quarterly rate increases, instead held steady in the first quarter as the global economy weakened and markets swooned. Its benchmark rate remains in a range between 0.25 and 0.5 percent. The Fed is holding rates at historically low levels to support economic growth by encouraging borrowing and risk-taking. It plans to raise rates, gradually reducing those incentives, as the economy gains strength.
http://www.nytimes.com/2016/05/19/business/economy/federal-reserve-interest-rates-meeting-minutes.html?ref=business&_r=0
What do you guys think? Is the United States economy ready for higher interest rate? How will this affect domestic investment and foreign investment? How much do you think Fed will raise next month?
I'm not so sure whether the Fed can raise the interest rate or not because there are some bad indicators for current status of economy. I remember Jay posting a post about wage being stagnated, growth being sluggish, and labor force participation rate continuing to sink. So I don't know the Fed is ready.
ReplyDeleteI think they will only raise interest rates at most one more time this year. First they projected four rate hikes then a few months later the projection went down to two. I think they will wait until after the election to do another rate hike.
ReplyDeleteI am not so sure either that the Fed will raise interest rates. They have been saying for a while that they were going to raise interest rates and never have. If the Fed does decide to raise interest rates, I think it would be good to raise them before the election. No one knows who these next candidates will be and it could either be good or bad for the economy. Doing it now is better than waiting for unpredictable circumstances.
ReplyDeleteIt looks as though private domestic investment is already higher than it was before the crisis. The theory is that lowering the FFR will spur greater investment which will help the economy, if I'm not mistaken. So if investment has already gone up so high maybe it really is time to raise the rates. Here's a weird theory, what if the Fed keeping interest rates so low is actually what is suppressing wage growth? Because they can get a loan so easily it is still better to invest in more machinery than to hire people for the job. If the Fed were to raise the rate, then the loans required to get machinery would be more expensive and wages for people could finally go up. I may be totally wrong here, but that would suggest a major change in Fed policy.
ReplyDeleteAs Spencer said, it seems as though investment has gone up since the end of the recession, so it would make sense for the Fed to increase the rate, albeit slowly in small increments. Although the economy is in a delicate state, we're doing much better than most of the developed world and this raise should further increase the value of our money and encourage Americans to save more. Saving is crucial for all countries and most Americans barely save anymore.
ReplyDeleteAs Kenny mentioned above, the fed has seemed to be unsure of their intentions with the interest rates as of late. From my basic knowledge of the impact of interest rates on the economy, I know that the pattern is generally to raise rates when the economy is booming, and ensure economic stability. I hope the rationale for keeping rates high isn't political.
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