The Federal Reserve Is Nervous About Its Rate Policy

Market analysts were surprised when the Federal Reserve did not change the interest rates in the first week of May 2016.

The Fed was assessing inflation indicators, international economic & financial growth and the impact on the labour market. However, some experts believe the Federal Reserve forecasts are unrealistic.

According to Peter Boockvar, Lindsey Group Chief Market Analyst, “the Fed will never get the perfect conditions they seek before increasing short-term rates once again. The Fed’s mandate isn’t to have a perfect world. That only exists in fairy tales, dreams and in your econometric models”.

The Federal Reserve has been following an accommodative monetary policy for a long period. The strategy of expanding the money supply (lower interest rate) is to bolster economic growth by encouraging consumers and companies to increase their expenditure.

The Federal Reserve has been receiving suggestions from weak global banks, and therefore, there is a reason for ensuring the interest rates stay low.

Again, the Fed is transferring its emphasis to apprehensions pertaining to global development. The Fed had stated in March 2016 that international economic and financial growths remain risk prone, though there seems to be a change in the perception recently.

The decision makers in the Federal Reserve are coming up with various excuses without initiating any rate hikes. The Federal Reserve has been following an expansionary monetary policy for nearly eight years, but they have increased the interest rates only once. Hence, experts believe “the Federal Reserve is nervous about its rate policy”.

It’s a complex environment to be in and the Fed does not have a solution to resolve the issue. There have been several policy failures in the past which have contributed to the current scenario.

Some experts believe the central banks are facing a credibility crisis because of the inability to create greater asset prices, resulting in the stock market volatility.

Industrial production in the US has been slow because investors are not sure about making an investment due to uncertainty. Extensive regulation and the apprehension pertaining to the US election are also contributing to the negative sentiment.

In a global economy that is already being impacted by high debt, the cost of money is not a critical factor and it is not a mandatory restriction on any stakeholders’ decision making. At present, there is a requirement to take policy decisions on the direction of interest rate and excess liquidity in the market. However, such a policy decision by the Federal Reserve is going to take a very long time.

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