Summary: A discussion about why the Federal Reserve has decided not to increase the interest rate.
Click here and here to read the accompanying articles.
Click here and here to read the accompanying articles.
1. What is the situation?
Despite strong speculation and expectations that the Federal Reserve (Fed) would raise the interest rate in the US, the interest rate remains unchanged. This comes as a shock to many speculators, investors and analysts.
2. What is the background?
The steps towards recovery after the 2008 Financial Crisis in the U.S. called for several years of Quantitative Easing (QE) and expansionary monetary policy. With this came a lower interest rate to encourage spending and thus boost the domestic market. After seeing encouraging signs that the U.S. economy is recovering, many investors and analysts expected to see the Fed raise the interest rates again.
3. What are the encouraging signs that are being shown?
A few of these signs include:
1. The median forecast for 2015 growth has increased from 1.9% to 2.1%.[1]
2. Unemployment is now lower than it has been since 2008, currently resting at 5.1%. This is around the Fed’s target unemployment rate. [1] [2]
3. Business confidence has increased generally among the public. [2]
4. The housing market is now stronger than before. [2]
4. Why haven’t they raised the interest rate?
There are a few primary reasons why the Fed has decided to keep the interest rate static. The first one is that the inflation rate is at 0.2%, substantially lower than what the Fed had hoped for. The Fed argues that since increasing interest rates would further exacerbate the inflation, it may be prudent to wait for inflation to pick up. The reason for such weak inflation can be attributed to a strong dollar and cheaper oil. [2]
Another reason why the Fed has opted against an increased interest rate is because the labour market is showing slack [1] [2], despite encouraging unemployment rates. Chairwoman of the Federal Reserve, Janet Yellen, argues that there are still many part-time workers looking for full-time jobs. She also states that an improved labour market would show encouraging signs that inflation would pick up. [2]
The third reason for the Fed’s decision is attributed to the sudden devaluation of the Chinese Yuan. [1] [2] As a devaluation in the Yuan results in a struggling export sector in the U.S., the Federal Reserve notes that it has to hold off the increase so as not to put extra pressure on the domestic export sector.
5. When will the Fed raise the interest rates?
Popular opinion is that the Fed may consider it again in December. [2]
The Chairwoman’s words that the Fed is waiting for inflation to increase means that many speculators expect that as soon as inflation has increased, the interest rates will as well. [1] It is hard to say whether there will be a long gap between the increase of inflation and interest rates, or whether the latter really will follow the former in quick succession.
The Fed will have to keep an eye on the global economy. While it wishes to strengthen the domestic economy, the U.S. economy is far too involved in the global economy for it to be ignored [2]. Encores of China’s devaluation or similar problems may cause them to postpone the interest rate increase yet again.
Whenever it does raise the interest rates, we can expect that it will be slowly and cautiously. [1]
[1] http://www.economist.com/blogs/freeexchange/2015/09/fed-and-interest-rates//fsrc=rss
[2] http://www.bbc.co.uk/news/business-34286230
Despite strong speculation and expectations that the Federal Reserve (Fed) would raise the interest rate in the US, the interest rate remains unchanged. This comes as a shock to many speculators, investors and analysts.
2. What is the background?
The steps towards recovery after the 2008 Financial Crisis in the U.S. called for several years of Quantitative Easing (QE) and expansionary monetary policy. With this came a lower interest rate to encourage spending and thus boost the domestic market. After seeing encouraging signs that the U.S. economy is recovering, many investors and analysts expected to see the Fed raise the interest rates again.
3. What are the encouraging signs that are being shown?
A few of these signs include:
1. The median forecast for 2015 growth has increased from 1.9% to 2.1%.[1]
2. Unemployment is now lower than it has been since 2008, currently resting at 5.1%. This is around the Fed’s target unemployment rate. [1] [2]
3. Business confidence has increased generally among the public. [2]
4. The housing market is now stronger than before. [2]
4. Why haven’t they raised the interest rate?
There are a few primary reasons why the Fed has decided to keep the interest rate static. The first one is that the inflation rate is at 0.2%, substantially lower than what the Fed had hoped for. The Fed argues that since increasing interest rates would further exacerbate the inflation, it may be prudent to wait for inflation to pick up. The reason for such weak inflation can be attributed to a strong dollar and cheaper oil. [2]
Another reason why the Fed has opted against an increased interest rate is because the labour market is showing slack [1] [2], despite encouraging unemployment rates. Chairwoman of the Federal Reserve, Janet Yellen, argues that there are still many part-time workers looking for full-time jobs. She also states that an improved labour market would show encouraging signs that inflation would pick up. [2]
The third reason for the Fed’s decision is attributed to the sudden devaluation of the Chinese Yuan. [1] [2] As a devaluation in the Yuan results in a struggling export sector in the U.S., the Federal Reserve notes that it has to hold off the increase so as not to put extra pressure on the domestic export sector.
5. When will the Fed raise the interest rates?
Popular opinion is that the Fed may consider it again in December. [2]
The Chairwoman’s words that the Fed is waiting for inflation to increase means that many speculators expect that as soon as inflation has increased, the interest rates will as well. [1] It is hard to say whether there will be a long gap between the increase of inflation and interest rates, or whether the latter really will follow the former in quick succession.
The Fed will have to keep an eye on the global economy. While it wishes to strengthen the domestic economy, the U.S. economy is far too involved in the global economy for it to be ignored [2]. Encores of China’s devaluation or similar problems may cause them to postpone the interest rate increase yet again.
Whenever it does raise the interest rates, we can expect that it will be slowly and cautiously. [1]
[1] http://www.economist.com/blogs/freeexchange/2015/09/fed-and-interest-rates//fsrc=rss
[2] http://www.bbc.co.uk/news/business-34286230
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