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Interest Rates and Inflation

As the job market has started to pick up in the recent months, there has been some talk at the Federal Reserve to start raising shor-term interest rates. An interesting article from the Wall Street Journal depicts that some central bank officials believe that the rate will increase towards the middle/end of this year (probably during the Fed’s meeting in June). The presidents of the Fed in Atlanta, St. Louis, and San Francisco are all behind the idea. They have each seen hearty improvements in their job markets, and the Fed believes the strong job growth to continue into the future. Some Fed officials would like to see inflation rise before the interest rate increases. Inflation has been short of the Fed’s 2% target rates for quite sometime. “Ms. Yellen told Congress this past week that the Fed expects to start lifting rates once it is ‘reasonably confident’ inflation will rise toward that goal, if the labor market continues to improve as expected.” Fed officials have seen the decrease in unemployment and believe that inflation will increase. As the unemployment rate continues to drop, currently it is 5.7%, it can create pressure within the labor market, which will cause inflation to rise. Using employment statistics will help the Fed gauge when it is appropriate to start increasing the short-term interest rate.


  1. Well, “headline” U may have dropped, but what is NAIRU??? In particular, should we be looking at U-6 and not U-3, or at employment-population ratios for workers age 25-54, or at wage increases?

    Relative to Bernanke, Yellen is not bothered by a few dissident votes. So should we care that not all of the 12 Fed presidents are on the same page [the governors all toe Yellen’s line]? Remember that not all of the Fed presidents are even economists.

  2. deplautt deplautt

    I am wondering how exactly the presidents of the Feds beyond Atlanta, St.Louis and San Francisco are looking at this situation. Since the job markets in these areas have improved it may be that the viewpoints of those in different areas where the job market has not seen such positive changes may not see the benefit of increasing the interest rate. It is important to take a look at each Fed presidents’ viewpoints before moving forward based on the national economy as well as the economies in each district.

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