When will the Federal Reserve Increase Interest Rates?

By Aditya Koppikar ’18

Interest Rate Pic

It appeared that the time had come.  Unemployment, which had been 10% in October of 2009, is at the very low rate of 5.1%.  In the second quarter of this year, consumer spending went up 2.9%. After over seven years of having an interest rate hovering between 0.00 and 0.25%, many individuals across the United States were eager for the Federal Reserve to finally increase interest rates.

However, on September 17th Janet Yellen, the Federal Reserve chair, decided to maintain the interest rates as they were, keeping them between 0.00-0.25%. To investors, this may have been disappointing. A hike in interest rates would have shown confidence in US financial markets. Furthermore, the increase in interest rates may have signified that we have finally recovered from the Great Recession that started eight years ago, a time many of us still remember too well.

Looking at the data, as well as what has been happening around the world, it becomes clear that Janet Yellen and the Fed made the right decision. Many pin this problem on international concerns. With the Chinese government devaluing their currency, US exports are now more expensive to the Chinese. With the US dollar increasing in value worldwide, it is becoming ever more expensive for foreign companies to conduct business with American firms. Additionally, with oil prices decreasing to less than $47 a barrel and an overall increased global supply of oil, stock prices of oil producers have been decreasing rapidly. With cheaper imports and a stronger dollar, the inflation rate has stayed at a very low rate of about 1.6%, despite a very low unemployment rate. Another cause of concern is that although more people are employed than before, people are still very cautious about spending money. Banks still retain ample reserves as a means of protection.  Consumers too are not spending at the rate that they should to elicit a hike in the inflation rate.

However, despite these causes for concern, Americans should remain optimistic. Janet Yellen herself has said that these most recent downward inflationary pressures are only temporary, and that long term stable inflation is determined by public expectation. On September 24th, Janet Yellen announced that the Federal Reserve will most likely raise interest rates by the end of the year.

So if these downward pressures are temporary, then why did the Federal Reserve not raise interest rates in the first place? Even though the Federal Reserve was only planning to raise interest rates minimally, the act of raising interest rates would have caused changes all around the world. We live in a connected world, where banks across many different nations are interrelated. For example, after the US decided to maintain interest rates as they were, central banks in Norway and Taiwan also lowered interest rates. Although this was not necessarily a cause and effect relation, one cannot help but think that the Federal Reserve’s decision had an effect on other countries. If the Fed had increased interest rates, other banks may have done so as well, leading to not just a US contractionary monetary policy, but also a global one. The Federal Reserve simply wants more concrete evidence of the strength of the economy before making such a decision.

Seven years after the Great Recession started, Americans, though in a much better shape overall, still remember the hardships well. It looks like we will have to wait a little longer for the Federal Reserve to increase interest rates.

Sources:

http://www.nytimes.com/2015/09/25/business/janet-yellen-says-fed-is-likely-to-raise-interest-rates-this-year.html?_r=0

http://money.cnn.com/2015/03/16/investing/us-dollar-fastest-rise-40-years/

http://www.wsj.com/articles/janet-yellen-says-fed-interest-rate-increase-still-likely-this-year-1443128438

http://www.bea.gov/iTable/iTable.cfm?reqid=9&step=1&acrdn=2#reqid=9&step=1&isuri=1

http://fortune.com/2015/08/19/what-chinas-currency-devaluation-means-for-the-worlds-trade-deals/

http://www.reuters.com/article/2015/07/30/us-usa-economy-idUSKCN0Q40BT20150730

http://www.nytimes.com/interactive/2015/business/energy-environment/oil-prices.html?_r=0

http://www.bloomberg.com/news/articles/2015-09-24/haven-currencies-jump-as-norway-rate-cut-shows-global-growth-woe

Picture from article received from the New York Times collection.

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