The economy has shown moderate recovery since the height of the financial crisis back in 2008. This was in part due to the monetary policy goal of the Fed by setting interest rates lower and lower until they could not anymore, hitting the zero lower bound. With short-term interest rates at just about 0% since December of 2008, the US has had a real interest rate that is very low/negative with the goal of encouraging spending in the present and discounting the future a lot more. Any talk of raising the interest rates during this weak economic time would have not taken seriously. That is until now where the discussion seems to have legitimacy, based on where the Fed believes we are on track in the recovery stage.
Recently released meeting minutes reveal that Federal Reserve members have brought up the interest rate topic during their policy meetings. Some of the policy “hawks” (those who consider inflation control as a leading issue) expressed concern over a potentially overheating economy if hikes were not made. This would be a continuation of the Fed winding down its recovery. Just last month, we saw the Fed cut its bond purchases by $10 billion. The Atlanta Fed President Dennis Lockhard has said, “I expect the asset purchase program to be completely wound down by the fourth quarter of this year.”
Mr. Lockhart also said on Wednesday he remains “comfortable” with his forecast that the Fed won’t raise short-term interest rates until the second half of 2015, provided the economy strengthens as he expects.
At 6.5% unemployment, the Fed claimed to begin the talks of raising inflation. The current unemployment is 6.6%, leading some to believe that a rate increase is not far beyond the horizon. These higher than expected drops in unemployment have been partially speculated to due to a disproportionate number of elderly retiring, removing them for the labor force pool and thus the unemployment numbers.
Despite all possible what-ifs, I think this is showing some great news about the US economy. For as long as I’ve understood or cared enough to listen about economic news, we’ve been in or recovering from this crisis. It’d be interesting to finally be in a world with a bolstering economy. As funny as that my be to some who remember leading up to the financial meltdown, there are also concerns as the policy “hawks” at the Fed have mentioned about an overheating economy. Concerns over the nonconventional economic recovery tools (i.e. QE) may loom in the coming years. Spending is now longer as encouraged as saving inflationary times.