There has been much talk about the Fed’s plans for interest rates in the news and on our blog recently, and with the Fed’s next meeting quickly approaching the conversation continues. As of March 10th, Fed officials have stopped making comments on the economy or policy until their next meeting. Although Yellen has said the Fed will not raise rates in the next two meetings, if the Fed removes the label of “patient” next week, then discussion about raising interest rates could occur in as early as June. Many investors have looked at June or September as likely times to raise rates. Investors have remained relatively calm to hints of raising rates, but markets did respond negatively on Tuesday to the Euro reaching a 12-year low against the dollar (resulting from the ECB’s quantitive easing). Yellen has hinted that inflation is the key question moving forward, despite an improving job market. Yellen has stated that she wanted to be confident that inflation will return to 2% before raising rates. Other officials are not as confident, stating that they want to see other indicators are improving. These indicators include measures of inflation expectations, wages, and inflation measures excluding food and energy.
Source: http://www.wsj.com/articles/fed-leans-toward-removing-patient-promise-on-rates-1426014812
2 Comments
If interest rate changes take 6 months to begin to have an effect on the real economy, then won’t it be too late if the FOMC waits for inflation to be trending up before they take actions? What arguments would you line up pro? con?
If we believe that all consumers use rational expectations, do we believe that the Fed is purposely talking about less raising the interest rate in hopes that it has a more profound impact on the economy. As you noted people are already speculating when the rates could increase, which could neutralize the effects of increasing the interest rate.
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