The Fed has been making the decision to raise interest rate, not clearly when, but possibly soon. However, this time, they will execute the plan by relying on “a new system assembled from spare parts.” A team led by Simon Porter - the head of the Fed’s market desk in New York - has been experimenting by moving billions of dollar around the financial system. The Fed’s tradition way of raising interest rate was selling Treasury bonds to banks to take out the money in the market, but the immense stimulus campaign started in response to the 2008 financial crisis has pumped an excessive amount of dollar into the market that it has become to drain out money to discourage lending. “Selling quickly could roil markets; selling slowly could allow the economy to overheat,” so a new method was needed.
Instead, the Fed plans on throwing in more money to pay lenders not to make loans. This will freeze the excess money, instead of draining it all. And of course, there is a number of skeptical options with the new method, but the Fed officials shows confidence about the plan. Janet Yellen announced, “The committee is confident that it has the tools it needs to raise short-term interest rates when it becomes appropriate to do so.” Two years ago, Lorie Logan, one of Mr. Potter’s top aides, suggested the Fed could achieve the goal of raising interest rates by borrowing from companies at a minimum rate. The resulting deals, known as “overnight reverse repurchase agreements”, showed a significant breakthrough. When liftoff arrives, however, the Fed plans to place this machinery inside the familiar language of the old system and is likely to announce that it is raising the federal funds rate from its current range of 0 to 0.25 percent to a new range of 0.25 to 0.5 percent.
Link: http://www.nytimes.com/2015/09/13/business/economy/the-feds-policy-mechanics-retool-for-a-rise-in-interest-rates.html?ref=economy&_r=0
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