The Federal Reserve (Fed) is under close scrutiny by many at the moment. Each time its members hold a meeting, the common public expectation that it will raise interest rates “this time” is never met.
The Fed is America’s central bank, and last raised its rates almost 10 years ago, in June of 2006. Back then, its rates went up by 5.25 percent. Just shortly after, it pulled back the change, as it found itself in the midst of a “housing bust” and soon after a “Great Recession.”
The Federal Reserve is responsible for setting monetary policy to meet standards set by the Congress that are meant to maximize employment and stabilize prices. In a nutshell, the Fed tries to balance the load of cash in circulation and the resulting price movements of goods and services (inflation) by raising or lowering its rates.
— FOX Business (@FoxBusiness) October 29, 2015
Usually, the Fed raises its rates when the economy is doing well and the employment sector numbers are rising. The Fed’s rate, however, has stayed very much put for an unusually long period now.
According to the latest news release by the Bureau of Labor Statistics, as of September 2015, the “total non-farm payroll employment” increased by 142,000, while the unemployment rate was unmoved at around 5.1 percent.
Apparently, more jobs have been created in health care and information, while mining employment numbers have fallen.
According to CNN Money in an article released on September 4, 2015: “The state of U.S. jobs is pretty healthy,” saying further that the U.S unemployment rate was down by almost 50 percent since “the peak (10%) during the Great Recession.”
The mixed message
All the news about the unemployment rate falling and the economy steadily growing is leaving many confused because theoretically, they would expect the Fed to raise its rates under normal circumstances. Some experts wonder whether the Fed is holding back on raising its rates because of something that is taking place at a seeping rate, or because of something that is bound to happen.
“One of two things is going to happen. Either the US economy is or will soon be slowing on the back of already tighter financial conditions. Or the US economy will soon be slowing on the back of future tighter financial conditions […]”, according to Economist’s View.
The article says further that December is when it’s most probably going to happen, “really.” “No, really, this time. They mean it. After all, a number of them are on record repeatedly saying that they expect to hike interest rates this year.”
The interest rate decisions the Fed makes do not just impact the U.S. economy alone. Countries and emerging markets, like those in the Middle East and Africa, are also anxious to finally know what direction the Fed intends to take. According to Euronews, the Federal Reserve’s credibility is at stake now.
Watch this video from Euronews Business on the Fed’s interest rate dilemma:
According to the rule book, written but lost in the pile of other written and forgotten rule books, the Fed’s interest rate adjustment is ideally intended to achieve and maintain full employment, and it should apparently rise gradually over time, if things are going well, in order to promote a steady inflation. The Fed’s guiding assumption that “we can trade higher inflation for lower unemployment” is not supported by all economists.
“The Fed’s policies and pronouncements, and even the law that it operates under, are based upon the ‘Phillips Curve,'” and apparently “monetary inflation makes unemployment (and economic growth) worse,” according to a statement by Forbes.
Some think that the Fed’s decision to hold off on raising rates has to do with the current volatility on the financial markets. The International Monetary Fund (IMF) and the World Bank have also stated their concern about the Fed’s current game plan. Even the Federal Reserve’s members are “not on the same page.”
Managing Director of the IMF Christine Lagarde said: “The Fed has not raised interest rates in such a long time that it should really do it for good […], not give it a try and then come back”.
One thing is certain and can’t be stated any better than in the old saying: “Round and round she goes, and where she stops, nobody knows.”