Friday, September 4, 2015
Fed's Intrest Rate Situation
For a number of months now, there has been much talk of the Fed raising interest rates. While they have yet to do so, the intention is still there. This article explains the general situation but offers a stance against a rate hike.
The Fed is tasked with maintaining stable prices. After seven years of recovery, they fear inflation and risky investments that could be made with amazingly low rates. However, the personal consumption expenditures measure of inflation has been less than half of the 2% target that the Fed established. Wages are often a big driver of inflation but they have remained relatively stagnate while the labor market continues to move towards (but not reach) the natural rate. A rate hike would also further strengthen the dollar and hurt the trade balance even more. Lastly, the risks in a rate hike are asymmetrical. A hike too late would allow inflation to rise to say three or four percent, which is barely a problem when compared to historical rates. Conversely, a hike too early could stifle the recovery and tie the Fed's hands with a zero lower bound issue.
What do you think? Should rates remain low for a while longer or should the Fed just go ahead and raise them?
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3 comments:
I feel like with the sudden downward turn of the Stock Market, it might not be a bad idea for the FED to keep rates low for the time being. Raising them would only encourage people to take their money out of the market and put it in savings to earn the higher interest. Pulling money out of the market would only worsen the situation. So I feel like it might be a good idea to hold off on raising them for a little bit.
I think I disagree with Rachel's statement above. I feel that the Federal Reserve should increase interest rates because of the fact that if interest rates remain low, the Federal Reserve will not be able to lower them in the future if need be to help boost the economy. For example, a lower interest rate normally makes for cheaper debt financing, which in turn allows for businesses to expand their operations. This boost, then causes the economy to boost as well. If the interest rate remains close to zero, as it is now, the Federal Reserve will not be able to lower interest rates to help boost the economy later on. Furthermore, I feel that a slight increase in interest rates, while it will cause for some to save their money, will not cause a major disturbance in the economy due to the fact that the interest rate will not increase tenfold. If the Federal Reserve wants to take a safe approach to be able to protect the economy in case of an emergency later, then yes, they should increase interest rates soon.
I too agree with Kaley. Considering a rate hike from the sole perspective of the stock market, it is necessary. I sympathize with top hedge fund managers and analysts alike. Many, like Peter Tchir at Brean Capital are in favor of the inevitable rate hike, sooner rather than later. Considering the Fed raising interest rates as early as following Septembers meet would be beneficial to the market in the long run. yes it would presumably create volatile swings after the initial hike, but it is better in the long run. I sympathized with Tchir's view when he said "it's like ripping off a band-aid". investors will be more comfortable after the first hike is off the table. Additionally, postponing raising interest rates does not send the best picture to a market that is already highly volatile. In closing, Yes I agree with Kaley in her argument that the Fed should raise interest rates and hope that my argument through the eyes of investors offered another reason as to why the inevitable rate hike should be done sooner rather than later.
http://www.businessinsider.com/peter-tchir-on-fed-rate-hikes-2015-8.. (article referenced)
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