Surging Inflation will save the dollar as the Fed ramps up rate hikes
Source: https://www.cnbc.com/2018/02/16/surging-inflation-will-save-the-dollar-as-the-fed-ramps-up-rate-hikes.html
This was a very interesting article about inflation and its impact on currency markets and monetary policy. The Fed is already expecting three interest rate hikes in 2018 to combat the rising inflation. It is interesting to me that the Fed is worried about inflation because it is still around the 2% target mark. I don't really see any need, at least currently, to hike up rates and attempt to slow the economy down.
This has to do with policy decisions of both the Fed and the government as they have to decide what route to take the economy in 2018. Currently, with Trump in power, we are attempting to loosen regulations and decrease government involvement in the markets. It will be interesting to see what type of involvement the government has and how they react to these inflation rates.
Also, the government is currently in favor of tax cuts, which should increase consumption amongst individuals. It will be interesting to see the impact of this on investment and how it ultimately affects rates. If we see an increase in the demand of loanable funds as well as increasing inflation numbers, than we could be setting ourselves up for a large spike in interest rates.
This year should bring some changes to both monetary and fiscal policy, and it'll be interesting to see the type of involvement the government has in regards to combatting the inflation issue. Or at least what they think is becoming an issue.
2 comments:
It would be interesting to see how much interest rates hikes would have an effect on spending and investment in the economy. As mentioned, the inflation is at its target level of 2% so increasing the interest rates would encourage saving rather than spending, which has a negative impact on the economy in the long run (contractionary monetary policy). We will have to see the extent to the rise in inflation rates to see whether ramping up interest rates is the best solution for a healthy economy.
I agree with the increased interest rates because the FED is worried about the economy over-heating per say. This is when the economy grows too quick and is not sustainable. What follows this massive growth is usually a large market downturn, because that is what happens in business cycles. The FED is simply trying to control the business cycles and make the downward side of the business cycle not as bad.
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