Showing posts with the label interest rates

The Economy Moves from Unemployment to Increasing Wages

As the economy speeds up  Federal Resereve Chair Janet Yellen discusses the growing need to increase interest rates. For now the idea will be reevaluated on a meeting-by-meeting basis to determine when that might happen. Her discussion with the Senate Banking Committee eludes to the idea that her annual target rate will be somewhere around 2% depending on the strength of the economy. For the near future the economy is expected to continue growing.  The market forces related to the speed of the economy will determine these rates. Interest rates are the cost of borrowing money and is primarily based on demand and supply. As money is soaked up in the economy it becomes less liquid and shortages begin to raise the cost of borrowing that money to mitigate risks. For example what you pay for a car today would cost you more tomorrow as the product price rises. You wouldn't get that money for free without paying some type of interest on it as the lender takes risks. Getting money tod

Should Reversing QE Come Before Raising Interest Rates?

As the economy improves changes in Fed policy is likely but what action the Reserve will take is open to debate. The question was proposed by Tim Worstall in an article entitled, Should The Fed Raise Interest Rates Or Reverse QE First ? It is an important one as policy makers decide what they are going to do with this long-term debt while still trying to support America's re-emergence. It should be remembered that the purpose of QE was to stabilize the banking system that found itself without capital reserve not too long ago. As a crisis aversion tool the goal was to increase government debt through the buying of securities thereby putting more electronic cash, hence reserves, into the banks to avoid major defaults that could have dragged the economy down.  It became a crisis averted by transferring risks from the private sector to the government. As a policy stabilization made sense during a bank crisis but makes less sense as the economy recovers. The need to keep the liquid

Feds Announce the End to the Era of Quantitative Easing

The Federal Reserve announced a discontinuing of the controversial bond buying program at the end of October this year. They will keep the short-term rates around 0 for the near future.   To this point, the risk to inflation is relatively low and the economy has shown mixed signals of strength in the last year or so. The Federal Reserve seeks to support the   3% projected national growth rate while not undercutting gains in the employment market.  Lower Unemployment and Skepticism :  Unemployment dropped to 5.9% but wages have not risen to provide an income boost. Most Americans are still skeptical of the economy and feel that improvements will occur sometime next year. They are not sure when next year but “sometime” seems to be the target spot. It is skepticism that is a result of not seeing high paying jobs and wage increases. Bond Purchases :  The bond purchases were controversial from the beginning but were seen as one avenue of encouraging development out of t