I need help understanding why the Federal Reserve hasn't raised rates.

I guess since this forum is .co.uk, I'm on a British site. I'm studying econ in America and am hoping you can help me with the economic principles behind central banks. I think I read somewhere that the U.S and the U.K are in similar situations on this anyway. So please help me if you can.

The Fed apparently doesn't want to raise interest rates from .25% or something like that. An article I read said that its unwillingness to do this indicates that it is not confident enough in the economy to do so. Why is this? I mean how come this shows little confidence by the Fed and why does it need confidence in the economy before raising rates? I also figured out from reading on the web that it will only raise rates when inflation has picked up because it is basically at 0% right now. Why does it need inflation to raise rates? What would happen if it raised rates when inflation were 0%?

Thanks so, so, so much if you can lend any help to me. It would be truly appreciated.

Reply 1

scrotgrot

16

Emerging markets faltered this quarter. They fear recession and autumn is the traditional recession season. Therefore they deferred rate rises again. This consensus has emerged over a number of years due to caution after a pretty catastrophic recession. Most of the economy is highly leveraged with lots of private debt and the recession having been due to people getting mortgages they couldn't really afford. Therefore at all costs they want to keep borrowers in the black - home-owners have been loving life the past 8 years. The last time there were comparable recessions in our economies was during the 1970s stagflation whereafter the consensus emerged that controlling inflation was the most important thing. Keeping rates low helps to do this and they would rather undershoot than overshoot 2% which is held to be the ideal inflation rate.

Reply 2

Jcmason

Original post by kelly0101

I guess since this forum is .co.uk, I'm on a British site. I'm studying econ in America and am hoping you can help me with the economic principles behind central banks. I think I read somewhere that the U.S and the U.K are in similar situations on this anyway. So please help me if you can.

The Fed apparently doesn't want to raise interest rates from .25% or something like that. An article I read said that its unwillingness to do this indicates that it is not confident enough in the economy to do so. Why is this? I mean how come this shows little confidence by the Fed and why does it need confidence in the economy before raising rates? I also figured out from reading on the web that it will only raise rates when inflation has picked up because it is basically at 0% right now. Why does it need inflation to raise rates? What would happen if it raised rates when inflation were 0%?

Thanks so, so, so much if you can lend any help to me. It would be truly appreciated.

Ok, so the basic principle is that central banks such as the Federal Reserve or the Bank of England lower interest rates to stimulate the economy (when it's cheaper to borrow money, consumers and corporations are more willing to take on debt, e.g by buying houses or investing in production facilities, which in turn stimulates growth and increases employment rates). When growth is strong on the other hand, the central bank wants to ensure that wages and prices don't rise too fast, so starts to raise interest rates as a way to limit the risk of inflation. At the moment, the U.S and UK economies are emerging from a recession, with improvements in economic growth and employment, but these are still both relatively weak, so the central bank has to choose the timing and pace of interest rate increases carefully. If they raise rates too soon or too aggressively, they risk putting the brakes on a still fragile economy and falling back into recession. If they wait too long or increase rates too gradually, they risk the economy overheating, with the subsequent risk of inflation, or alternatively, enter another recession with rates already close to zero, having missed the opportunity to raise rates when growth was relatively strong and find themselves in the situation where they no longer have the main tool they can use to stimulate the economy. That's why it's important that they get the timing and rate of increase right, based on a range of economic indicators. Hope that helps.

I need help understanding why the Federal Reserve hasn't raised rates.

Quick Reply

Related discussions

Latest

Trending

Trending

Articles for you