Should The Federal Reserve Increases Maintain Interest Rates?

The Federal Reserve has the dual job of ensuring price stability and maximum employment, which are contradictory objectives. The Feds try to achieve the goals through monetary policy which determines the demand and supply of money by controlling interest rates. The Fed’s goal is to achieve a natural rate of unemployment of more or less 5%. When the actual unemployment figures are below the natural rate of unemployment, inflation increases and there is a high demand of goods and services propelling the economy with the ensuing labor demands and the pressure it places on wages, which in turn produces inflation. When the Fed is faced with this scenario, it must increase the rates to slow the growth and achieve price stability (contractionary cycle).

The federal reserve has raised interest rates five times in less then twelve months, and the pervious raises are just barely beginning to take effect. The previous raises averaged around a quarter percentage point, and since these raises failed to slow the economy, Greenspan, unable to take anymore chances doubled the previous with a promise of more to come.

The discussion of whether the Federal Reserve should raise the federal funds rate is a highly contentious one. Members of the Federal Reserve (“Fed”) and academic economists disagree about what constitutes appropriate future macroeconomic policy for the Unites States. In the past, the Fed had been able to raise rates when the unemployment rate was under 5% and inflation was at a target of 2%. Enigmatically, since the Great Recession and despite a strengthening economy, year-over-year total inflation since 2008 has averaged only 1.4%—as measured by the Personal Consumption Expenditures Price Index (“PCE”). Today, PCE inflation is at 1-1.5% and has continuously undershot the Fed’s inflation target of 2% three years in a row. (Evan 2015) In the six years since the bottom of the Great Recession the U.S. economy has made great strides in lowering the published unemployment rate from about 10% back down to about 5.5%. In light of this data, certain individuals believe that the Federal Reserve should move to increase the federal funds rate in 2015 because unemployment is near 5% and inflation should bounce back on its own (Derby 2015). However, this recommendation is misguided.

To begin, The Federal Reserve System opted to raise interest rates that were placed near zero years ago in order to aid the economy’s growth and prevent inflation from exceeding the target number. Several factors including: the five percent drop in the unemployment rate, and the increase in wages, and the outlook on future inflation contributed to the Federal Reserve’s decision take this action. However, the increase in interest rates in December has generated mixed results, and it appeared the Federal Reserve would announce the interest rates were going to increase again. Instead, Janet Yellen, the chairman of the Federal Reserve, announced that there were better days ahead for the economy, and a slow and careful approach to future increases in the interest rate would serve the economy best, ensuring the growth is maintained. Although the interest rates remained the same early in 2016, they are expected to increase during the June meeting of the Federal Reserve. but cited the economy needed low interest rates in order for the economy to maintain growth. I find it interesting that Yellen continues to worry about inflation growing in the coming years, although the interest rate increase should keep inflation in check through its effect of the economic markets. Yellen sites that she would like the inflation to become and stay at 2 percent each year. However, the current inflation rate is .9 percent, so the the economy is a long way from achieving its target inflation rate

The Federal Reserve exercises its power to stimulate stable employment economies and economic prices. The pursuit of the required employment rate and the creation of price stability, the Federal Reserve can increase or decrease the interest rate.

Over the past decade, the Fed has responded fairly to inflation and unemployment. According to the Federal Reserve (2017), between late 2008 (the era of the Great Recession) and October 2014, the Federal Reserve purchased longer-term mortgage-backed securities and notes issued by certain government-sponsored enterprises, as well as longer-term Treasury bonds and notes. In essence, lowering the level of longer-term interest rates and improving financial conditions (the Fed.com, 2017).

Janet Yellen states, “the possibility that low long-term interest rates are a signal that the economy's long-run growth prospects are dim….depressed long-term growth prospects put sustained downward pressure on interest rates. To the extent that low long-term interest rates tell us that the outlook for economic growth is poor, all of us should be very concerned, for--as we all know--economic growth lies at the heart of our nation's, and the world's, future prosperity.” A high interest rate is usually set when an economy is already well off. An example of an economy that's well off is with the result of inflation. But if inflation is left unchecked it will lead to a loss of purchasing power meaning that your dollar is worth less than what it was before. This is where high interest rates become a great convenience to the economy. Though this may sound proficient, ultimately a high interest rate that lasts lead to struggles within the economy. Borrowing will become more difficult due to rates being to high which will also cause less productivity to

The Federal Reserve (FED), is the central bank of the United States. It was created by Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system (Federalreserve.org, 2016). The monetary policy of the US is governed by the FED, which assist in regulating the supply and demand of money in the market. Interest rates are a very important tool of monetary policy that economists use to achieve the targets defined for the country’s monetary policy. Interest rates have a profound impact on the value of the country’s currency, inflation, export competiveness and imports into the country. Interest rates also impact the inflow and outflow of funds into or out of the country. Due to their wide reaching impact on the economy, if the Fed decides to raise the interest rates at the end of this year it will definitely impact several aspects such as consumer financing, annuities values, the NPV calculation, the WACC and corporate earnings.

Moreover,some economists also argue that an increase in the rates now would be better than waiting until later on when the Federal Reserve will have to increase the rates eventually. Unemployment is also at a low rate, and the economy appears to be stable enough to handle an increase in the interest rates. The Federal

The Federal Reserve is well known for its role in setting the nation’s monetary policy which influences the money and credit conditions in an effort to promote the goals of maximum employment, stable prices, viable growth, and low inflation. It is the job of the Federal Reserve to ensure there is enough money and credit that encourages economic growth but not excess money that would cause the currency to lose its value. The Federal Reserve assesses labor and market conditions, inflation pressures and expectations, and financial and international developments to support continued progress.

Just a few days ago, the Federal Reserve increased the federal funds rate from 1.25% to 1.5%. The federal funds rate is one method that the Federal Reserve uses to control monetary policy. The other methods used by the Fed to control monetary policy are open-market operations, and the discount window. The federal funds rate is defined as the interest rate that banks charge each other to lend reserve funds. The federal funds rate is usually than the discount rate so that banks are more inclined to go to other banks first, rather than the Fed. During the recession in 2008, the federal funds rate was near 0 in the hopes that banks would lend more, and the economy would be kickstarted. However, as the effects of the

The line is vertical because once the Fed sets the money supply, it remains constant until the Fed changes it”(Hall and Lieberman). This is exactly what the Fed conducted for this month. The interest rate can only be changed by the Fed changing the money supply in the money market. The Fed has to watch how much they increase interest rates, “The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal”(FOMC, June 14, 2017). The job of the Fed is to influence the interest rate but there is a dilemma concerning how much the Fed can actually raise it. The growth of the economy has been slow, along with low inflation just below 2% the FOMC released, with two of their main goals for the year being “maximum employment and price stability” being a 2% inflation rate(FOMC, June 14, 2017).

levels stable. When setting rates the Fed must consider the unemployment rate, inflation rate, and

In this article Federal Reserve Chairwoman Janet Yellen stated that there is “no fixed timetable” for raising the U.S. interest rates. She also confirmed that rate increases will happen since strong labor market gain continue, which will push inflation above the current central back target. The current labor market has continued a growth trend and employers are adding new jobs each month. Additionally the unemployment rate has been held relatively steady. The chairman also warned that if job gains continue and unemployment drops further the inflation rate could rise, which will subsequently raise interest rates at a faster rate than planned.

One of the most consistent defenses against deflation is for a central bank to target an inflation rate greater than zero. The Federal Reserve’s current inflation target is 2% and has informally been at that rate for quite some time. This nonzero target provides a cushion for policymakers: should inflation decrease due to an unexpected shock to aggregate demand, prices should not immediately start falling. This allows policymakers to act with easy money when inflation reaches 1 or 0%, thus avoiding deflation. Yet, during the last two recessions in the United States, the 2% inflation rate did not prevent significant fear of deflation. Extraordinary action was required, and many economists argue that the low interest rate policy following the 2001-2002 recession contributed to the housing bubble that was inflating at that time. It is not yet known what the impact will be from the unorthodox policies taken in response to deflation fears in 2009-2010. Based on these experiences, it may be time to consider alternative inflation targets to provide greater insulation from deflationary pressures.