ECON430-Topic #1: Fed to Raise Rates?

The Federal Reserve’s (FOMC) meeting will be taking place on September 16th and 17th, and it had long been expected that this was when the Fed was going to raise the federal funds (fed funds) market target interest rate. The Fed has been targeting the fed funds rate between 0.0% and 0.25% since the December meeting in 2008 after the financial crisis began to really take hold. After the June 2015 meeting, the Fed released projections submitted by the members of the FOMC, and 15 of the 17 participants estimated that rates would increase in 2015, with 10 estimating that the rate would be higher than 0.5% before the end of the year. While there are two more meetings this year, if the Fed does not act to raise rates now, it is very unlikely that this forecast of higher than 0.5% could be met. Most economists believe that the Fed will actually not change rates this coming week, but those surveyed are pretty close to evenly split.

Several Wall Street analysts disagree on what might happen next. Some believe the global economic situation is in a difficult state, and that the Fed should not increase rates yet. Others believe that the economy is healthy, and that we are long overdue for an increase rates. However, oil prices have fallen dramatically since the July meeting, the Chinese economy and stock market are struggling, and China has been unloading US debt in order to help pay for corrective measures. Furthermore the US stock markets are down nearly 10% since their recent all-time highs, and have recently been extremely volatile. International factors may or may not play a role in moving the Fed’s hand, but global volatility and general weakness make it a potentially difficult time to raise rates. Goldman has recently reported that they believe financial markets are already tight enough that it is equivalent to three rate increases.  On the other hand, the unemployment rate has fallen to 5.1%, and the US by itself is not doing all that poorly other than the volatility in stock markets.

Questions you might try to answer:

Remember, don’t try to answer all of these questions, just focus on one, provide some evidence, and support your opinion. NOTE: There is a delay between you posting your comment and it appearing, since I have to approve all comments by hand. Make sure you save your comment in a word processor file before posting it here. I cannot help you if  “the ether” ate your homework.

  • What do you think the Fed is going to do next week? (If it already happened by the time you post, clearly a prediction is not in order). By this, you should not just say “I think this…” without providing some evidence to support your opinion. If you think the Fed should stand pat, or raise (lower?) rates, or do something else then you need to point out why.
  • If you think what the Fed does next week really does not matter in the grand scheme of things, what do you think should be done from a monetary policy perspective that would help the economy?
  • Should the Fed pay attention to US only factors, or global factors when making a decision like this? What is the expected impact of this change on other markets that are also currently weak? Do you think the recent changes in Chinese policy will have much of an affect on the Fed’s decision if any?

Tip: Do not capitalize all the letters of “Fed” since it is not an acronym. This really bothers me…

21 thoughts on “ECON430-Topic #1: Fed to Raise Rates?”

  1. The fact that there has been such rampant speculation on the Federal Reserve’s rate hike of only twenty-five basis points reassures the problem in the global economy. People are scared and economic behavior in the world has changed and this accepted idea of risk for return has fundamentally changed. The Federal Reserve will raise interest rates to affect the convexity of the United States Treasury yield curve and allow for more flexibility in their future balance sheet decisions (1).

    The model of equilibrium monetary conditions and the use of exogenous interest rates to influence economic variables is not what this argument is about. Rather, current economic discussion needs to be drastically changed. Assuming the expected interest rate hike stems from a need to “normalize,” what exactly is this new “normal?” The Federal Reserve chairman from 1979 to 1987, Paul Volker, is credited with ending relatively high inflation in the United States economy by targeting a higher federal funds rate (2). The Consumer Price Index was experiencing twelve to fifteen percent changes annually from 1978 to 1982 (3). In addition, the effective federal funds rate was targeted by the Federal Reserve models at approximately nineteen percent in 1980 (4).

    Two to three percent inflation is possible when historical volatility is analyzed. Hicks – Hansen models tell that an increasing monetary base has a positive effect on price levels, but where are these so called “inflationary pressures?” There are severe deflationary pressures in not just the United States’ economy, but the entire global environment. This stems from drastic losses of foreign currency values, relative to the dollar, and the end of the commodity super cycle. The expected rate hike decision is based on future cash flow risks caused by near-zero interest rates and the need for a more tangible opportunity cost for capitalist agents, rather than out of control price momentum.

    1) http://www.bloomberg.com/news/articles/2015-04-08/2016-fed-balance-sheet-decision-looms-beyond-rate-liftoff
    2) http://www.economist.com/blogs/freeexchange/2010/03/volcker_recession
    3) https://research.stlouisfed.org/fred2/series/CPIAUCSL
    4) https://research.stlouisfed.org/fred2/series/FEDFUNDS

  2. Kaitlyn Paonessa

    In order to promote financial stability and economic growth, the Federal Funds rate will stay in between the original target of 0.0% to 0.25%. Based on the “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents”, the projections for 2016 indicate no need for an increase in the Federal Funds Rate. Specifically, March projections from 2015 to 2016 indicate no change in Real GDP, a decrease in the Unemployment Rate, and increases in PCE Inflation and Core PCE Inflation. Based on these projections, one would assume that the Fed would keep the Funds Rate low (as it currently stands) to help spur economic development within the US. Lower interest rates will help promote investors to borrow and invest money, which can potentially boost Real GDP. Also, increasing inflation to two percent has been the Fed’s goal and thus, expansionary monetary policy (via keeping interest rates low) could help the Fed reach its two percent inflation target.

    Furthermore, the instability of the global market is also a pressing issue: “China’s weakening growth outlook [has been a main driver] of significant volatility in financial markets in recent weeks” (Wall Street Journal, 2015). The potential for an increase in the interest rate has also been creating instability in the US financial market: “[investors] are running very little risk ahead of the meeting”, knowing that an increase in the federal funds rate could dampen investments worldwide (WSJ). The Fed’s mandate dictates that the interest rate will remain low until it is “reasonably confident that inflation will move back to its 2 percent objective” (The Federal Reserve). The Inflation Rate, YTD, is 1.64% according to Stat Bureau, which is clearly not at the target level. The Fed will keep the Federal Funds Rate between its current target in order to achieve its goals.

    http://www.federalreserve.gov/faqs/money_19277.htm
    https://www.statbureau.org/en/united-states/inflation
    http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150617.pdf
    http://www.wsj.com/articles/global-stocks-calmer-ahead-of-u-s-rate-decision-1441959468

  3. It does not matter whether the feds increases the rates or the feds keeps the rates at the same level (technically zero) because it has no long term impact on the economy. According to FRED, (1) the effective fed funds rate was on an increasing trend from 1950’s 1.22% until 1980’s 19.10% and then it reverse the trend and it decreased to almost 0% and it stayed at almost 0% since the end of 2008. Also, it is clearly observed that 8 of the 9 US recessions occurred during a decreasing trend on the effective fed funds rate while almost no recessions occurred during the increasing periods.
    Taking in consideration the same period of time, there is no visual correlation between the effective fed funds rate and the percentage change from preceding period on both GPD (2) and Real GPD (3).
    However, they should increase the rates because the total public debt as percent of GDP has exceeded 100% since the last quarter of 2012 (4) and borrowing more than what is been produced does not seem to be economically logical.
    (1) https://research.stlouisfed.org/fred2/series/FEDFUNDS
    (2) https://research.stlouisfed.org/fred2/series/A191RP1Q027SBEA
    (3) https://research.stlouisfed.org/fred2/series/A191RL1A225NBEA
    (4) https://research.stlouisfed.org/fred2/series/GFDEGDQ188S

  4. Today, the US dollar is the international reserve asset. Eighty percent of international trade finance takes place in dollars, as well as ninety percent of foreign exchange transactions and the majority of commodities futures (1). Because of the dollar’s unique position, the US Federal Reserve’s actions have much stronger international effects than those of most central banks. When the Fed raises the inflation rate all US dollars lose some value, but new money is created domestically. This means that the value lost through dollar inflation internationally actually gets absorbed back into the US economy, essentially a fee for using US currency. Whenever the Fed raises inflation that revenue stream increases, but it also becomes more difficult to maintain.

    Raising inflation will also cause international investors to substitute US currency for US assets. Increased demand for assets denoted in US currency would allow the US government to borrow at lower rates. This could be very useful considering that China recently dumped a large amount of US debt (2). If China decides to stop or reduce lending to the US, then the US government will have to look elsewhere for funds. Stimulating demand for US assets by raising inflation is a good way to prepare for that potentiality.

    (1) http://www.bloomberg.com/news/articles/2014-07-15/dollar-dominance-intact-as-u-s-fines-on-banks-raise-ire
    (2) http://money.cnn.com/2015/09/10/investing/china-dumping-us-debt/

  5. The Fed needs to account for international economic issues when deciding when to pull the trigger on an increase in interest rates. China has a very significant effect on the market for U.S. treasuries and their continuing liquidation of this debt to prop up their own currency needs to be accounted for because their effect on the world economy is larger now than it’s ever been (1). An example of their power over the world economy can be seen with Brazil and their recent fairly recent slip into recession, partially due to China cutting back on their own economy (2). Even though there are other key issues regarding Brazil’s recession, China’s role is significant nonetheless. Raising interest rates in the U.S. will lead to reverberations all around the world economy so it’s important that the world is ready for it.

    Brazil being in recession and also their recent debt downgrade should be a noteworthy issue that the Fed accounts for on the global scale. Brazil has the 2nd largest economy in the Western Hemisphere so it’s quite a significant economy failing (3). Raising interest rates just makes it worse for Brazil and other struggling economies (that have dollar denominated debt) by making it even harder for them to pay off their debt because of the relative rise of the dollar relative to other currencies when the interest rate increases.

    (1) http://www.bloomberg.com/news/articles/2015-08-27/china-said-to-sell-treasuries-as-dollars-needed-for-yuan-support
    (2) https://www.washingtonpost.com/news/worldviews/wp/2015/05/20/china-and-brazil-are-becoming-bffs-should-we-be-worried/
    (3) http://money.cnn.com/2015/08/28/news/economy/brazil-recession/index.html

  6. The Fed should raise interest rates this week to limit market volatility and signify stability to the domestic and world economies. In August 2015 77% of economists forecasted that the Fed would raise interest rates in September. On September 10, 2015 that had dropped to 56% as economists became more wary of the Feds intent (1). These statistics highlight the issue that inaction from the Fed increases uncertainty and volatility in the market as investors attempt to guess the Fed’s next move. 4-Week Treasury Bills have not exceeded 0.16% since 2008 and have more often been essentially 0% (3). Although international concerns have increased volatility in the stock market, investors are also very sensitive to speculation of the Fed’s potential moves.

    A rate increase may initially increase volatility in the stock market; however, this is necessary for long-term stability and will help show that interest rates are not determined by minor stock market shifts. The initial rate increase will still keep rates very low, estimated up to the 0.25% to 0.50% range, but further increases down the road will help return rates to a more natural level (4). The time to raise rates will never be perfect, but the Fed should act now in order to limit speculation trading and help the stock market return to a more stable position (2). This will set a standard for increasing rates and will allow the Fed to continue its rate increases in the coming years.

    (1) http://www.bloomberg.com/graphics/2015-fed-rate-hike-predictions/
    (2) http://money.cnn.com/2015/09/12/investing/federal-reserve-interest-rates-stocks/
    (3) https://research.stlouisfed.org/fred2/series/TB4WK
    (4) http://www.forbes.com/sites/chuckjones/2015/09/14/the-fed-should-raise-interest-rates-in-september/

  7. Janet Yellen has made it clear that the Fed plans to raise the target interest rate sometime in the next 8 months (1), and it is likely that the change will be made this week. With the unemployment declining to under 6% and economic conditions recovering from the 2008 financial crisis, conditions seem to be set for the Fed to increase the target interest rate (2). Raising the target interest rate would make it more expensive to borrow money, thus reducing spending and volatility which would stabilize these recent favorable economic conditions.
    Some believe that the increase may not take place immediately because of the recent downturn in the U.S. stock market (3). Limiting spending right when the stock market took a downturn could stabilize the economy in an unfavorable place, leading some to believe that it is wiser to hold off on reducing volatility until the market has rebounded. However, monetary policy typically takes 18-24 months to influence the real economy so the Fed may choose to increase the target interest rate now in hopes that the market will recover before the change is actually felt (4).
    Others believe that low inflation rates are also influencing the Fed to hold off on raising target interest rates (2) (3). Increasing the cost to borrow by raising interest rates would limit the amount of money available for consumers to spend, causing the economy to slow and for inflation to further decrease. However much of the recent deflation can be attributed to a decline in oil prices, which in turn reduce the price of energy based products (3). Because this decline in prices is not attributed to the target interest rate, even if the Fed did increase the rate, inflation will level out as the price of oil levels out.

    1. http://www.nytimes.com/interactive/2015/business/economy/fed-interest-rates.html
    2. http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150617.pdf
    3. http://www.bankrate.com/finance/federal-reserve/fomc-meeting-preview-0915.aspx
    4. http://www.forbes.com/sites/timworstall/2015/03/21/its-not-if-its-when-is-the-federal-reserve-going-to-raise-interest-rates/

  8. The Fed uses low federal funds rates to prop up consumption during a recession; however, with the current rate so artificially close to zero there is no room to push the interest rate lower in the event of another recession in the future (1). If the US economy again sunk into financial crisis, the Fed would have to get creative with monetary policy or look to negative interest rates to reinvigorate the economy. The FOMC ought to raise the federal funds rate such that, if needed, it has the potential to be lowered again without breaching the rate’s zero lower bound constraint (2).

    Many economists warn of the potential dangers of negative interest rates and it is unknown how the US economy would respond to such policy. A federal funds rate forced below zero would encourage consumers to hoard their money “under the mattress,” which in turn would create a shortage of loanable funds and drive the interest rate back up; however, the central bank runs the risk of suffering a devastating bank run before that happens (1, 3). In addition, bank profits could diminish as lenders try to preserve their customer base by absorbing the cost of negative interest themselves. This would make banks even less likely to lend money which could ultimately cause the policy to backfire (3).

    In order to confidently continue using low interest rates as a tool to stimulate the economy, the federal funds rate must have the potential to be lowered. The Fed should raise the interest rate to avoid the uncertainty of a negative interest rate policy in the future.

    (1) http://www.economist.com/blogs/economist-explains/2015/02/economist-explains-15
    (2)https://clevelandfed.org/Newsroom%20and%20Events/Publications/Economic%20Commentary/2012/ec%20201215%20where%20would%20the%20federal%20funds%20rate%20be%20if%20it%20could%20be%20negative.aspx
    (3) http://www.bloombergview.com/quicktake/negative-interest-rates

  9. Before deciding on a plan of action regarding the rates, the Fed needs to take into consideration the impact that will occur on the economy as a result of the Trans-Pacific Partnership (TPP), if it moves forth. Part of the speculation for the strategy of increasing the rates stems from the fear of the impact that a downfall in China will have on the United States’ economy because the argument is that a downfall in China can hurt emerging economies (1). One of the purposes of increasing the interest rates is to limit the volatility and to increase growth in the United States; however, one needs to take into consideration that the TPP can actually enhance that stability with the increase in trade and resulting increase in jobs, eliminating fears that a downfall in China can hurt the U.S.

    The United States’ role in the TPP will allow the U.S. to gain the upper hand against China by giving the critical role of the creation of the rules regarding trade in “fastest-growing region of the world, the Asia-Pacific” (2). Twenty years after the North American Trade Agreement was created, in spite of the negative externalities experienced specifically in Mexico, exports to Canada and Mexico grew by 201 percent and 370 percent (3). This trade agreement in contrast to NAFTA involved 40% of the world’s economy and consequentially, will have a greater impact (4). By eliminating barriers to trade, the United States will continuously increase exports and decrease the impact that the strength of the dollar is speculated to have on exports (5). Until a definitive plan is reached, it is important that the Fed wait to make any decisions regarding a change in the interest rates because there is still too much uncertainty in the global economy.

    (1) http://www.wsj.com/articles/most-private-economists-think-fed-will-keep-interest-rates-near-zero-1442020817
    (2) http://blogs.wsj.com/washwire/2015/04/27/wsj-interview-transcript-president-obama-on-tpp-china-japan-pope-francis-cuba/ http://www.wsj.com/articles/most-private-economists-think-fed-will-keep-interest-rates-near-zero-1442020817
    (3) http://www.bloomberg.com/bw/articles/2013-12-30/nafta-20-years-after-neither-miracle-nor-disaster
    (4) http://www.bloomberg.com/politics/articles/2015-06-15/from-tpa-to-tpp-a-trade-deal-explainer
    (5) http://www.wsj.com/articles/persistent-dollar-strength-would-be-big-hit-to-u-s-growth-ny-fed-study-1437168176

  10. Given that the federal funds rate has been slashed down to essentially zero the past seven years, it doesn’t seem likely that the upcoming FOMC meeting will lead to a significant increase (1). The U.S. is still living in the wake of the 2008 housing crisis, and it’s easy to see how impactful a potential change to the federal funds rate has on the economy. It appears the main reason for this potential hike in the funds rate is to show the central banks confidence in the U.S. economy (2). For almost the past decade the economy has pushed the fed funds rate to alleviate the 2008 financial meltdown, and now there is a sense of a possible strengthening of the economy (2).
    It is only a matter of time before the fed funds rate is altered and returned to a more familiar percent. According to Fed Chairwoman Janet Yellen back in March, “ most of my colleagues and I believe the return of the federal funds rate to a more normal level is likely to be gradual (3).” So although a rise in the fed rate will most likely be gradual, it is expected to be put into action soon. In any case of how much interest rates will increase, there shouldn’t be an overreaction to an increase of 0.25% (3). The rates should increase, and if Americans understand it will be a slow increase, there shouldn’t be a mad rush to borrow money.

    (1) http://www.washingtonpost.com/news/wonkblog/wp/2015/09/15/the-economy-never-seems-to-be-as-good-as-the-fed-thinks/
    (2) http://money.cnn.com/2015/09/04/news/economy/august-jobs-report-2/
    (3) http://fivethirtyeight.com/features/dont-worry-too-much-about-a-fed-interest-rate-hike/

  11. The fed might be willing to postpone raising rates. First, with the Fed signaling a rate hike, policy makers would be against the tide of central bank accommodation around the world. Turbulence in global markets, china’s GDP is decelerating rapidly. Currency market is in chaos because of European countries’ economic malaise.
    Second, gasoline price is backing down near their lowest point this year. Low gasoline price is a calamity for many economies. Gasoline price effect U.S economy too much, because of the America is a petroleum exporting country. As a strong dollar drives import prices lower and gasoline prices continue to slide, the Fed’s 2 percent inflation target gets harder to hit.
    Third, the stronger U.S. dollar is starting to weaken U.S. manufacturing and exports. (1)The stronger U.S dollar will undoubtedly exacerbate the U.S. trade deficit, thereby affecting the U.S. economic growth. The general business conditions index in New York is down 19 points to -14.9, the lowest level since 2009. (2) The stronger U.S. dollar will affect the global income of American multinationals. Good news for stronger U.S dollar is more and more people are willing to hold dollar U.S dollar on their hands. If they interest rates raise, It means FED is doing something for prevent the outflow of funds. Banks can hold more money for future loan and invest. It will be preparations for new U.S economy growth recycle. Because of the America is a capital exporting country, Triffin dilemma is becoming the biggest problem for U.S government. FED raise the interest rates can ease American government’s fiscal deficit.
    I think china government’s decision will effect FED make decisions. China is “world factory”. Right now, China is going to change the role in the world. China is making an “OBAOR” plan and Stronger “BRIC”. CHINA is planning to get SDR. Those plans will have the big impact on U.S dollar and FED should do something to increase confidence for people who hold U.S dollar.
    1,http://money.cnn.com/2015/08/12/investing/china-yuan-fed-rate-hike/
    2, http://www.cnbc.com/2015/08/11/currency-war-how-china-devaluation-may-impact-fed.html
    3,http://www.investopedia.com/articles/investing/091015/how-slowdown-china-affects-feds-upcoming-decision.asp
    4, http://blog.ce.cn/html/50/115250-1919436.html

  12. A problem with the Fed not raising interest rates this year, could impact the wage growth and employment categories. Our current unemployment rate is low, but we still have not got to the point of full employment. 6.5 million people are working part-time involuntarily, and the economy needs an additional 3.3 million jobs to reach pre-recession employment levels (1). With the wage rate slightly rising, it has still yet to reach the 3.5 percent increase that the economy is looking for. However, when the August numbers came in, there was an increase of 173,000 new jobs and the official unemployment rate dropped to 5.1% (2). This sounds great on the surface that our economy is doing exactly what the people want, but that number was still short of the predicted amount of new jobs that was going to be available this past month. With unemployment going down and wages growing, there becomes a fear of moving into an overheated economy. This is just another variable added to the scare of going into another recession, but by raising these rates now, would help target the raising inflation that would be produced by an overheated economy.

    On another side, investors don’t really care about an increase or not in the interest rates. Regardless of what the Fed does tomorrow, investors expect global growth to keep rates low in the long term (3). Another example of this can be seen with what is happening in China. Investors can plan and act accordingly with whether or not China’s problem gets fixed sooner or later. If sooner, then investors would hope for no increase in the rates, so that they can see how China got out of their situation and do the same. But, if China isn’t fixed right away then investors would welcome the increase to help prevent a future potential asset bubble (4).
    (1) http://www.huffingtonpost.com/entry/federal-reserve-interest-rates_55f1bb6de4b03784e27858bd
    (2) http://www.nytimes.com/2015/09/05/business/economy/jobs-report-hiring-unemployment-wages-interest-rates.html?_r=0
    (3)http://www.wsj.com/articles/investors-look-beyond-fed-meeting-see-low-rates-1442361064
    (4)http://fortune.com/2015/09/08/interest-rates-economy-august-jobs-report/

  13. Since members of the FOMC are elected by presidential administrations, the FOMC has great incentive to make choices beneficial to the government before the long run success of the market (1). Governors and presidents on the committee are picked through political appointments. With the Obama administration in year 7, they have by now picked a majority of the members so that its decision making process is now heavily invested in one direction. In effect, the federal government owns the Fed and thus there can be made an argument that its power is corrupted.

    The Fed won’t dare raise the interest rates yet since it would hurt inflation. When the government has 18 trillion dollars (2) of debt on its hands, anything moving the country closer to deflation would make it more expensive for the government to pay off its massive tab. It’s the same route the Fed took in the early 2000’s (3) when the debt was reaching levels it had never reached before (as it is now).

    (1) “The Financial Crisis and the Free Market Cure” – John A. Allison
    (2) http://www.usdebtclock.org
    (3) http://www.wsj.com/articles/SB10001424052748704207504575129630378724708

  14. Many are fearful of the recessions that have historically followed interest rate hikes, but US businesses actually stand the most to gain. As rates go up local goods seem more attractive, however international companies with lots of debt will not do as well (1). What’s more is that if the fed chooses to increase rates there are international factors at hand that cannot be ignored.
    When rates go up the US dollar will inevitably inflate (2). This will hurt our trade balance because other countries will be less prone to importing US goods. Specifically because China’s growth has slowed down to a 4% annual increase. When we increase interest rates that will cause a decrease in exports to China. Foreign speculation alone that China is no longer growing is enough to scare away potential investors (4). So to many this seems like a bad time to pull such a stunt. But will trade really be thrown off by such a slight increase?
    In reality so long as the rates stay close to zero, then the US will continue to enjoy a balanced trade. The slight quarter percent increase will not really effect foreign markets substantially but it may promote marginally more local consumption. Even though that means importing less it could also mean consuming more at home while keeping exchange rates favorable for traders.
    Could just be the fed testing the water for a more drastic hike? Or perhaps the strategy is a very slow increase of .25% every 6 months of so. 2% interest rates seem like a reasonable long-term goal, and if that were the case this would just a small step in the feds end game (3). It may be the time to raise rates, but the global implications certainly cannot be taken lightly.

    (1) http://www.cnbc.com/2015/09/15/when-the-fed-raises-rates-heres-what-happens.html

    (2) http://www.investopedia.com/ask/answers/040315/how-do-changes-national-interest-rates-affect-currencys-value-and-exchange-rate.asp

    (3) http://www.nytimes.com/interactive/2015/business/economy/fed-interest-rates.html?_r=0

    (4) http://www.nytimes.com/2015/09/10/world/asia/in-china-a-forceful-crackdown-in-response-to-stock-market-crisis.html?_r=1

  15. The Fed should pay attention to global factors when making the decision to raise interest rates and as a result, should not raise rates this meeting. Market volatility and the USD strengthening are two major reasons to not raise.

    As of late, the US and global markets have experienced an extreme amount of volatility due to global economic uncertainty. China’s growth prospects have been questioned which has had a ripple effect on emerging markets as well as the US market. China’s massive demand for commodities and other items which has fueled emerging market growth is now slowing and putting pressure on these countries. As a result, we have seen markets (specifically US markets) experience abrupt and large swings as well as credit spreads widen. These moves have caused Goldman Sachs’ and the Chicago Fed’s financial conditions indexes to both tighten by the equivalent of more than a 25 BP rate hike (1). As Larry Summers notes, the “markets have already done the work of tightening” so why should the Fed think it necessary to cause more financial tightening with an uncertain and pessimistic global backdrop.

    Many emerging markets are experiencing capital outflows due to the uncertainty associated with their economic prospects as mentioned above. As a result, their currencies and asset markets are seeing massive devaluations causing ramped inflation. This is causing their respective central banks to step in and defend their currencies draining their reserves. If the Fed raises rates in the US, the USD looks more attractive and more capital will flee these emerging economies to the more attractive dollar denominated assets. This will strengthen the dollar even more (+20% over the past year on trade-weighted basis (3)) which will have an adverse impact on exporters, inflation, as well as inflation expectations. This exodus of capital from emerging economies might not only cause a global recession but will also hamper growth and inflation in the US. As The Daily Reckoning states, “in a globally interconnected economy, nobody wins” with a rate hike (2).
    Sources:
    1. http://larrysummers.com/2015/09/09/why-the-fed-must-stand-still-on-rates/
    2. http://www.businessinsider.com/bad-things-thatll-happen-on-fed-hike-2015-9
    3. http://www.economist.com/news/leaders/21664137-fed-should-wait-until-inflation-closer-target-raising-rates-false-start

  16. It is unlikely the Fed will raise rates today in the face of uncertainty about China and the recently volatility in the stock markets. In the wake of the financial crisis the federal funds rate has been set at 0.25% with and effective rate often well below that (1). The actual mechanism by which the Fed raises rates has changed since the past and there is a lot of uncertainty as to what would happen if something were to go wrong while implementing new policy. For the past seven years the Fed’s policy has been aimed at forcing investments into riskier assets in order to encourage economic activity and reduce unemployment (2). While the majority of FOMC participants believe that the appropriate federal funds rate is higher than what it is currently it is unlikely that the Fed would raise the federal funds rate at this time (3). The unemployment rate in the United States is steadily declining, currently sitting at 5.1%. The United States is not yet at pre-crisis employment levels (4) and changing the federal funds rate could stifle further gains in employment (5). Whether or not they raise the federal funds rate in the December meeting is a different story, but with the goal of reducing unemployment and the recent uncertainty surrounding market conditions it is unlikely the Fed will change its policy today.

    (1) https://research.stlouisfed.org/fred2/series/FEDFUNDS
    (2) http://www.nytimes.com/2015/09/13/business/economy/the-feds-policy-mechanics-retool-for-a-rise-in-interest-rates.html
    (3) http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150617.pdf
    (4) https://research.stlouisfed.org/fred2/series/UNRATE
    (5) http://www.bloomberg.com/news/articles/2015-09-15/yellen-s-former-aide-says-a-rate-hike-would-be-a-serious-error

  17. @Frank Imoehl
    Frank is correct to say that the Fed should pay attention to the global market, and therefore they should not raise rates this meeting. I especially liked what he said about currency appreciation/depreciation effects, which is something I did not consider. Global markets have a significant impact on our economy, and when such a large market like China struggles as it has the past month, this effect on our economy simply cannot be ignored, and means we must delay raising interest rates.

    China is the second largest economy in the world, and is by far the most impactful economy to our own. This means large changes in the Chinese economy will have significant effects on ours. China’s financial market has been down over 50% in the past few months of this summer, which is an enormous drop for such a large country. This drop means a ton of volatility in the Chinese market, which in turn means volatility in our market, as our market has dropped 10%. The trend is clear; if the Chinese economy struggles, we endure a portion of that struggle. The Chinese have tried to counteract the financial market downturn by putting restrictions on selling stocks and have imposed investigations on insider trading to a much higher magnitude than before. They have also suspended any IPO’s and prohibited investors who own over 5% of a company from selling (1). These new policies are in an attempt to steady the financial market prices and minimize volatility, which will probably happen, but it also brings strong negative effects. Restrictions will discourage investors from investing in China, which means prices will drop lower again. Therefore, the Fed should wait until the Chinese financial market is fixed before raising rates.

    Another related issue in China is the fact that they are now selling U.S. assets. The economy is depreciating and needs more cash to combat it, which is uncharacteristic of an economy that is almost always in surplus. It has gotten so bad the Chinese had to spend $235 billion to boost the financial markets (2). It has been proven why the Chinese economies decline hurts us, but another major issue arises when the Chinese need to borrow money. The Chinese are by far our biggest lenders of money, as we tend to bring out deficits and they have surpluses. But, as the Chinese surplus decreases, it becomes less likely they will lend us money, or will be forced to lend us money at a higher rate, which clearly hurts our future economy. The Fed must take future lending into account when deciding to raise rates, and should, again, not raise rates until the Chinese economy has stabilized back to normal.

    While China is obviously the most important economy to us, to further the idea that was must take greatly into account the global economy is shown in the crude oil market. On July 1, 2015, when the U.S. economy was still booming, crude oil was selling at $56.94 per barrel. After the economy has dropped nearly 10%, crude oil has dropped to $44.07 as of September 14, 2015 (3). This does not mean as crude oil drops, the U.S. economy must decline with it. But, it does show that such a major drop in oil prices in a couple of months means volatility, and this volatility is spread to the U.S. economy. The whole point of the Fed waiting to raise rates was so our economy would stabilize from the recession of 2008, and changes in the global economy in the past few months have brought about volatility in the U.S. economy, meaning the right thing to do is wait before raising rates.

  18. The Federal Reserve put too much consideration in global affairs in their decision to hold current interest rates and they need to raise rates as soon as possible. The September 15, 2015 projections by Federal Reserve Board members and presidents shows that the change in real GDP and the unemployment rate both exceeded their June projections, with GDP rising by 2.1% ahead of a 1.9% projection and unemployment down to 5.0% ahead of a 5.3% projection. Even PCE inflation, the measure that has been the lagging puzzlingly for the few years was ahead of the 1.3% prediction by .1%. (2) All signs are pointing to a long awaited heating up in the U.S. economy and yet, because of “recent global economic and financial developments,” the Fed chose to keep the federal funds rate at the current 1 to ¼ percent target range. (2)

    The effect China and the Middle East has had on the U.S. and global economy cannot be totally discounted, but the Fed should not be so wary of these situations. U.S. exports to China only account for about 1% of the US GNP and the low energy prices prompted by increased production in the Middle East is considered a temporary situation. (3) As Nima Guerin noted in his earlier blog post, “monetary policy typically takes 18-24 months to influence the real economy,” leaving Yellen little time to move preemptively on higher inflation. If Yellen does not raise interest rates soon, the eventual heat up in the economy may force the Fed to raise rates much more quickly than anticipated. Such an action could severely destabilize the economy as Yellen herself admitted saying, “I don’t think it’s good policy to have to slam on the brakes.” (3) The other members of the FOMC seem to concur, with 13 of them indicating 2015 as the appropriate time to raise rates. (2)

    (1) http://www.federalreserve.gov/newsevents/press/monetary/20150917a.htm
    (2) http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20150917.pdf
    (3) http://www.usatoday.com/story/money/2015/09/17/september-fed-meeting/32521713/

  19. When deciding on future rate increases the Fed should pay attention to the economies of the world and not only the US factors. Economies are no longer isolated and are interconnected on the world stage leading to the recent activity in China affecting the Fed’s decision. China devalued their currency in an attempt to get the yuan closer to its exchange rate equilibrium. This action had greater effects than China anticipated and in response their foreign-currency reserves fell a record $93.9 billion in August in order to keep the yuan from crashing (1). Shrinking the reserves along with the transition from exportation to a consumption society is making investors unsure about the future in Chinese markets.

    Weak currencies look bad in the short term, but in the long term could lift an economy (2). As a countries currency devalues their exports look more attractive from foreign buyers. This in turn causes exports to increase and could help boost the economy. However, when the Fed was threatening a rate increase global investors are hesitant to move out of dollars and into more risky currencies. If the rate was increased these weak markets that rely on imports would continue to downward spiral due to the country’s currency weakening against the dollar (2).

    With all the uncertainty surrounding the world economy the Fed should keep the rates near zero until both the markets in China and other weaker markets around the world stabilize.

    (1) http://www.wsj.com/articles/china-august-forex-reserves-down-by-93-9-billion-as-pboc-intervenes-1441614856
    (2) http://money.cnn.com/2015/09/02/news/economy/global-currency-down-china/

  20. The Fed decided to keep maintain the same federal funds rate today, and they made the wrong choice. Human beings are risk averse creatures and this decision was further evidence of that – the majority of 2015 has indicated that a rate increase is in order, yet it was only the events one week ago that changed everything (1). Those against the increase were predominantly focused on China’s downturn (2), but neglected signs that pointed to the U.S. being ready for a rate increase. The unemployment rate dropped to a seven-year low of 5.1% in August (3) and for the first time since 2007, over half of Americans thought our economy was in good condition (4).
    If the Fed would raise rates, the income of savers would rise and could lead to an increase in consumer spending and continue to get us on the right track (5). It can also lead to further job growth, as small businesses are responsible for close to two-thirds of new jobs and an increase in rates would make credit more accessible to them (5). Aside from these positives, if we continue to keep rates this low, we could be leaving ourselves without a shield should we face another recession soon (6).
    There will always be something to scare us and we’re currently only talking about a quarter point rise in rates, which is miniscule (7). We haven’t raised rates since 2006 and we need change.

    (1) http://www.bloomberg.com/news/articles/2015-09-10/one-volatile-week-could-seal-fed-stance-after-years-of-low-rates

    (2) http://www.wsj.com/articles/wsj-survey-most-economists-predict-fed-will-stay-on-hold-in-september-1441980000

    (3) http://www.theguardian.com/business/2015/sep/17/federal-reserve-interest-rates-record-low

    (4) http://www.cbsnews.com/news/americans-view-of-the-economy-most-positive-in-eight-years/

    (5) http://www.forbes.com/sites/jeffreydorfman/2015/09/17/5-reasons-why-the-fed-should-have-raised-interest-rates/

    (6) http://www.latimes.com/opinion/editorials/la-ed-fed-interest-rates-20150914-story.html

    (7) http://money.cnn.com/2015/09/12/investing/federal-reserve-interest-rates-stocks/index.html?iid=EL

  21. Janet Yellen cited different reasons to explain the Fed’s recent decision not to raise the federal funds rates but the key motivating factor here seemed to be the uncertainty in global markets, rather than any specific deficiency in the US economy (1). Most of the focus in global uncertainty has placed the blame and worry on China due to their recent stock market crash and slowdown in economic growth. Other global factors seem to have contributed to this decision as well, however. The IMF recently ‘urged’ the US to postpone a fed funds rate increase until early 2016, one of the many voices cautioning against raising fed funds rates too soon and suffocating the economic recovery thereby risking a backslide requiring quantitative easing (3 & 7). Similarly, the World Bank echoed the IMF’s warning against raising rates, claiming, “tightening will hurt economies in emerging and developing countries as the dollar strengthens” (2). It wouldn’t help that many of these economies, such as Brazil, Egypt, and Chile, are already struggling with the global slump in commodities due to the decrease in Chinese demand (3).

    The Fed may or may not have given heed to the warnings of the IMF or World Bank when making thier decision, but the strategy outlined by Janet Yellen seems fairly in line with the recommendation made by the IMF. It stated that the fed “should remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident” (3). Excluding Yellen’s comments on tightening the labor markets, which were really just further comments towards target inflation (as firms bid up wages, they must raise prices, eventually inflation increases (8)), this is exactly what the fed is planning to do- raise the rates soon, just not until more straightforward evidence on increased inflation is produced.

    Ultimately, even if the Fed decided not to look at any of the current global factors when considering whether or not to raise the federal funds rate, looking at the history of similar situations could provide vital experience of how to proceed in a situation that is literally unprecedented. The attempt of raising the federal funds rate to essentially “make money harder to get” despite the fact that the banking system has $2.5 trillion of excess reserves has never been done before, and it is widely acknowledged the Fed has their challenges cut out for them (6). However, analyzing situations like in Europe or Japan can help demonstrate the severity of risk in acting too soon. In 2011, the European Central Banks rose rates and some have argued that it was this increase in rates which led to slowed economic growth in the region (2). Another example occurred in 2000, when the Bank of Japan lifted rates in response to quickening growth instead of being a little more patient, leading to years of rock-bottom interest rates (7).

    There are numerous different arguments expounding on the risks of waiting too long to raise rates (loss of Fed credibility, increased risky behavior in the financial market, etc.) versus raising funds rates too soon (stifling growth, worsening asset bubbles, etc.). Based on global experience and economic conditions, waiting until early 2016 for stronger signs of increased inflation and the tightening of labor markets, along with an improved outlook for global markets, seems less detrimental to the US economy than acting too soon and raising rates and risking our progress since 2008 before growth has stabilized.

    1 http://www.wsj.com/articles/wsj-survey-most-economists-predict-fed-will-stay-on-hold-in-september-1441980000
    2 http://www.bloombergview.com/quicktake/federal-reserve-rates-liftoff
    3 http://www.bloomberg.com/news/articles/2015-06-04/fed-urged-by-imf-to-postpone-rate-liftoff-to-first-half-of-2016
    4 http://www.bloomberg.com/news/articles/2015-09-17/yellen-s-decision-to-delay-fed-liftoff-points-to-global-risks
    5 http://www.bloomberg.com/news/articles/2015-09-17/fed-leaves-interest-rates-unchanged-at-zero-0-25-target-range
    6 http://www.bloomberg.com/news/articles/2015-09-17/here-s-the-guy-who-will-raise-the-fed-s-rate
    7 http://www.economist.com/news/leaders/21664137-fed-should-wait-until-inflation-closer-target-raising-rates-false-start
    8 http://www.economist.com/blogs/freeexchange/2015/09/fed-and-interest-rates

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