An article on Bloomberg online edition states the U.S. Fed is keeping a close eye on the inflation indicators to decide whether to raise the interest rate for the first time in seven years. The economists continue to have low inflation rate expectations in the near future. The commodity prices have also declined and the latest job numbers have been strong . In short, the author reports that the Fed would only increase the interest rate if the inflation rate is expected to reach the Fed’s target level in the near future and if the Fed fears the costs of any inaction could be could significant for the economy.
The article reports the interest rate has been at near zero level for seven years . It makes sense because the Fed lowered the interest rate to encourage businesses and consumers to borrow more and help the country recover from the financial crisis. Inflation has not been a concern all these years due to weak demand and high unemployment rate. But now the unemployment has fallen significantly and falling commodity prices have also increased consumers’ disposable income . As a result, the Fed has a reason to be concerned because interest rates kept at low rates for too long encourage risky and speculative behaviors and low prices also hurt the businesses.
The article is easy to understand because one of the causes behind the housing boom was low interest rates that remained at low levels for too long. I expect the Fed to raise interest rate in December because not only the employment figures are encouraging but the Fed would also like to discourage widespread expectations of low inflation in the near future. It is also important to recognize the fact that commodity prices are also down due to China’s economic struggles and as China rebounds, the commodity prices may start rising again.
Torres, Craig. Inflation May Guide the Pace of Fed Rate Hikes After December. 30 November 2015. 30 November 2015 <http://www.bloomberg.com/news/articles/2015-11-30/inflation-may-guide-the-pace-of-fed-rate-hikes-after-december>