With a resilient economy, the Federal Reserve faces a challenging decision regarding tightening monetary policy. This Tuesday and Wednesday, Fed officials will decide whether, when, and by how much to cut rates. As interest rates went up, builders were concerned, but some of them achieved record profits due to a shortage of existing homes. Combined with consumers' resilience, this success suggests that monetary policy may not be as restrictive as it seems. It is important for the Federal Reserve, however, to carefully assess its policies as the federal-funds rate is relatively high, and there are signs of a possible economic slowdown.
According to some experts, solid growth implies that rates may not be significantly higher than neutral. The Minneapolis Fed president compares the situation to having one foot on the brake rather than two, which may explain the limited reduction in demand despite rate increases. Also, historically low mortgage rates and government spending have affected sectors, like housing, less negatively than interest rate increases. Despite this, delinquencies are rising and commercial real estate values are falling, which are weakening indicators, raising concerns.
Because the Fed is also concerned about inflation and economic expansion, its decision-making process regarding interest rates ends up being complicated. There may be a need to adjust interest rates downward if inflation continues to decrease.But it becomes less clear the need for policy changes if the economy continues to grow solidly. In determining the appropriate course of action for the Fed, these factors must be balanced.
5 comments:
This is a very interesting dilemma. One question I do have is how do you think the lack of existing homes will affect the fed's review of their monetary policy?
It is very interesting to see that even with high interest rates we are still seeing construction companies growing, and people buying more homes, even when this goes almost directly against what we are told is supposed to happen.
I cannot see the FED ever lowering rates. It is pretty obvious I think that they will never return to pre-covid levels.
Luisa, it is an interesting time that we are in. Our economy is a current mess and not even the feds are 100% sure about what is going on. It seems as if we are in a slow steady growth upward, but at the same time, we are facing higher than normal inflation rates. The best course of action right now is to wait and see how the economy is doing before making any drastic decisions.
It seems to me like the Fed is kind of experimenting on how to deal with this. COVID had unprecedented effects on the economy and the impacts afterward have been long lasting, so it is a bit hard to predict what will happen.
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