With low unemployment rates, and the possibility of inflation and the inversion of the yield curve, the Federal Reserve and its decision regarding raising interest rates have been in the spotlight multiple times this year, including today.
The Fed has raised its benchmark rate twice this year, in March and in June, and it penciled in two more rate increases by the end of this year. Its decision is mainly to prevent inflation and overheating of the economy.
At the annual central banking conference in the Grand Tetons this week, the Fed showed its intent to keep raising interest rates.
This year has been marked with extreme robust economic activity. Higher-than-expected CPI growth of 2.9%, GDP growth rate of 4.1%, unemployment of just 3.9% are all very valid reasons behind the raises. Such CPI growth and low unemployment, coupled with tax cuts, can lead to inflation. By raising short term rates, the Fed can curb inflation worries.
The rate increases were also met with criticism, though. On July 19, President Donald Trump showed that he is not happy about the interest-rate increases in an interview with CNBC. Despite the tradition of presidents not speaking directly about monetary policy, Trump said he was “not thrilled” about how the Fed tries to increase the rates whenever a sign that economy is strong.
One consequence of raising the short-term rates that made people weary is the inversion of the yield curve. Ideally, the long-term rate is higher than short-term rate, thus having the yield curve at a good state. However, if the long-term rate doesn’t move higher when the short-term rate is increasing, then eventually, the difference will become so meager that the yield curve will flatten, or even get inverted. The inversion of the yield curve is an important indicator of looming recessions.
On the complete opposite side, another criticism that the Fed has received is that it is raising rates too slowly. One research paper posted before Mr. Powell’s speech said if the Fed waits to see inflation happen and then raise rates, it will be too late since “monetary policy acts with a lag.”
The polarized sides are understandable, considering the current state of the economy. Inflation and unemployment rate are at desirable states right now, but any further development can bring poor results.
Regarding such concerns, Mr. Powell defended the Fed’s decision to increase rates this Friday at the conference. He said it is planning on gradually raising rates as long as inflation is stable—how it is now—and unemployment keeps falling.
Powell said this current plan is a result of considering both sides of the debate very seriously. He said that as of now, he doesn’t see any “clear signs” of a drastic rise in inflation or a “risk of overheating”—thus the gradual increase.
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Fed Chair Powell Defends Rate Hike Criticisms from Both Sides
With low unemployment rates, and the possibility of inflation and the inversion of the yield curve, the Federal Reserve and its decision regarding raising interest rates have been in the spotlight multiple times this year, including today.
The Fed has raised its benchmark rate twice this year, in March and in June, and it penciled in two more rate increases by the end of this year. Its decision is mainly to prevent inflation and overheating of the economy.
At the annual central banking conference in the Grand Tetons this week, the Fed showed its intent to keep raising interest rates.
This year has been marked with extreme robust economic activity. Higher-than-expected CPI growth of 2.9%, GDP growth rate of 4.1%, unemployment of just 3.9% are all very valid reasons behind the raises. Such CPI growth and low unemployment, coupled with tax cuts, can lead to inflation. By raising short term rates, the Fed can curb inflation worries.
The rate increases were also met with criticism, though. On July 19, President Donald Trump showed that he is not happy about the interest-rate increases in an interview with CNBC. Despite the tradition of presidents not speaking directly about monetary policy, Trump said he was “not thrilled” about how the Fed tries to increase the rates whenever a sign that economy is strong.
One consequence of raising the short-term rates that made people weary is the inversion of the yield curve. Ideally, the long-term rate is higher than short-term rate, thus having the yield curve at a good state. However, if the long-term rate doesn’t move higher when the short-term rate is increasing, then eventually, the difference will become so meager that the yield curve will flatten, or even get inverted. The inversion of the yield curve is an important indicator of looming recessions.
On the complete opposite side, another criticism that the Fed has received is that it is raising rates too slowly. One research paper posted before Mr. Powell’s speech said if the Fed waits to see inflation happen and then raise rates, it will be too late since “monetary policy acts with a lag.”
The polarized sides are understandable, considering the current state of the economy. Inflation and unemployment rate are at desirable states right now, but any further development can bring poor results.
Regarding such concerns, Mr. Powell defended the Fed’s decision to increase rates this Friday at the conference. He said it is planning on gradually raising rates as long as inflation is stable—how it is now—and unemployment keeps falling.
Powell said this current plan is a result of considering both sides of the debate very seriously. He said that as of now, he doesn’t see any “clear signs” of a drastic rise in inflation or a “risk of overheating”—thus the gradual increase.
5 Medical Stocks to Buy Now
Zacks names 5 companies poised to ride a medical breakthrough that is targeting cures for leukemia, AIDS, muscular dystrophy, hemophilia, and other conditions.
New products in this field are already generating substantial revenue and even more wondrous treatments are in the pipeline. Early investors could realize exceptional profits.
Click here to see the 5 stocks >>