Question

On December 16th, 2015, FED decided to raise first time the record low target rate of federal reserve fund from 1/4% to 1/2%.

On December 14th, 2016, Fed decided to raise the second time the federal fund rate from 1/2% to 3/4%.

On March 15th, 2017, Fed decided to raise the federal fund rate from 3/4% to 1%.

On June 14th, 2017, Fed decided to raise the federal fund rate from 1% to 1.25%.

On December 13th, 2017, Fed decided to raise the federal fund rate from 1.25% to 1.5%.

On March 21st, 2018, Fed decided to raise the federal fund rate from 1.5% to 1.75%.

On June 13th, 2018, Fed decided to raise the federal fund rate from 1.75% to 2%.

On September 26th, 2018, Fed decided to raise the federal fund rate from 2% to 2.25%.

On December 19th, 2018, Fed decided to raise the federal fund rate from 2.25% to 2.5%.

On July 31st, 2019, Fed decided to cut the federal fund rate from 2.5% to 2.25%.

On September 18th, 2019, Fed decided to cut the federal fund rate from 2.25% to 2%.

On October 30th, 2019, Fed decided to cut the federal fund rate from 2% to 1.75%.

Fed agrees that economic recovery is sound, Also Fed feels that the job market is strengthening, but the long term inflation signs still stabilized. Now Fed feel it is not necessary to maintain such accommodating easy monetary policy including very low interest rate until unemployment improves further and inflation rate goes up to 2.0%.

Fed decided that the size of the mortgage bond purchase as QE policy was winding down on October 2014 as the economy continues to improve.

The future rate hike will be gradual, depending upon the upcoming economic indicators.

1) What's your opinion about the Fed policy decision by next FOMC meeting?

2) Do you feel that this near-zero interest was a necessary one, or may not work to save declining economy, due to liquidity trap? or can we be back in double-dip recession due to too early exit strategy by the FED's tight monetary policy?

3) Are you concerned about the inflation come back due to such easy monetary policy with zero interest rate for long time? if so, how fast is the Fed supposed to tighten its monetary policy as an normalizing strategy?

4) Will the new president's proposal of spending increase on infrastructure and defense as well as tax cut on corporate income tax and individual income tax may overheat US economy to be inflationary? if so, will it cause Fed to speed up the rate hike? If Tariff over trade and possible retaliation could be inflationary, does it give another incentive for Fed to speed the rate hike?

5) Is there any risk that tight Fed policy may put the US economy back into another recession, if tight Fed policy is ahead of curve , although it is gradual tightening? Do you think the US will be in recession the next year(Year 2020)? Yes or No. Can You predict how many times Fed will raise FFR(federal fund rate) this year? or how many times FED will cut FFR due to trade issues and global slowdown?

Answer 1

1. Since 2015, the Federal funds rate has increased from 0.25 % to 1.75%. It also had reached 2.25% in the begining of 2019.

Generally rates are increased to encourage savings and discourage spendings to control, inflation. Fed had put a lot of money in US economy through govt. spending and quantitative easing to overcome 2008 financial crisis.Fed also believes that buying mortgage bonds to increase liquidity and promote spending is also not necessary as inflation is controlled and unemployment is also low.

Fed expects economic growth will be steady and aggregate demand will keep on increasing, inflation will go up and hence interest rates will be gradually hiked. This will also increase foreign investments in USA creating more jobs in manufacturing and service sector.

In my opinion, Fed is following right direction. However, more care needs to be taken as tariff wars may affect aggregate demand and aggregate supply making economy worse off in the medium to long run and again economy may slow down. They are likely to maintain same federal funds rate at 1.75%.