Rising Interest Rates

In the aftermath of our most recent exam were back at it again, blogging about current topics in the world economy. After spending many hours studying Professor Kimball’s material I found it only fitting that when I logged on to the Wall Street Journal the main page housed an article about the Fed debating on the appropriate time to raise the fed fund interest rates. The Fed has already began backing off Quantitative Easing strategy and allowing the interest rates to rise on both ten year treasury bonds and longer mortgage back securities. The FOMC meeting again agreed in January to cut assets purchases by another $10 Billion in the upcoming month, dropping the total to $65 Billion in the month. Many people except the Fed will continue cutting asset purchase by $10 Billion a month for the foreseeable future.

The article in the journal also addressed the Feds most current debate on allowing the federal funds rates to rise sooner than the previous target of 2015. The entire board was not in favor of the increased timeline, however at least two of the members found it appropriate to start the discussion of lowering the rates within the next six months, or possibly sooner. These members found that data points showing strong economic growth may warrant shortening of the time line.

There seemed to be two sides to the argument. Some argued the housing markets and job markets weak ending in January are both signs that the Fed Funds rate should remain pinned at zero, and even went as far as voicing the opinion to back off the constant cuts of $10 Billion a month. The opposing side argued back that these weak data points were a direct result of an extremely cold winter and expect them to bounce back to normal growth levels by in the short future.

My personal opinion is that the Fed should allow the fed funds rate to start creeping up past the zero lower bound its bin pinned at for the past five years. I think the Fed buying back up the 3-month treasury bills before it has completed its quantitative easing strategy would be beneficial. If all the high powered money came back “alive”, they would be able to quickly buy it up before an economic disaster. Starting to raise the fed funds rate before quantitative easing is completely undone will also work as a safe guard, since all interest rates are tied together it is unlikely the fed funds rate will surpass rates on longer term assets.

5 thoughts on “Rising Interest Rates

  1. gkugler

    The topic of rising interest rates is a hot topic and I think you hit the nail right on the head. I agree that the Fed has certainly signaled it will accept rising long term rates, but I would be very surprised if the Fed raised short term rates (most notably the Fed Funds rate) any time soon. I think it is extremely interesting that tapering has not caused long term rates to rise as much as expected (this might have to do with a flight to quality by investors).

  2. xcharles

    Well written. It’s interesting that the Fed plans to signal such actions even though the general public isn’t completely convinced that we are out of the recession. However, this was the biggest unconventional monetary policy in history, it makes sense to plan cautiously. It also helps that unemployment is headed back toward its target rate.

  3. jyyoo

    Interesting! I also wrote about rising interest rate, in malaysia. I am seeing some similarities between those countries..

  4. enjar

    I think in the case of FED’s believing in a stronger economy and increasing the interest rate, the FED should announce the date to increase the federal funds rate beforehand. In that way, the economy will have a time to adjust to high interest rate without sudden shock.

  5. wyna

    FOMC meeting minutes for Jan 28-29 suggests that they may target a new unemployment rate for threshold for interest rate hike. It is a good sign that US economy is recovering faster than expected, but i think it is also a sign that Fed is planning to keep 0 lower bound for a while.

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