When will FED increase interest rates? Talk is getting hot on Wall Street. In January, analysts were saying that FED will have to raise rates by the middle of this year. US economic data was showing a strong recovery putting pressure on FED to do something about the rate hike. In March, FOMC Meeting Minutes had one small sentence that said rate hike will take place sooner than expected. It made the market nervous and it went up and down trying to digest the implications of that sentence. Once again US economic data is not good making FED ambivalent about the rate hike.
The Federal Reserve risks another bond market tantrum if it continues to hold off on a rate hike, a former U.S. central banker said Tuesday.
Lawrence Lindsey, who served at the Fed in the 1990s before joining the George W. Bush White House, said the central bank had delayed normalization of rates “way beyond what is prudent.”
Rate hike is a tricky thing. If you have studied economics in university, you should know that there are no clear cut answers in economics. The job of FED is to keep unemployment low while at the same time keeping inflation low as well. The tools at the disposal of FED to achieve its policy mandate is monetary policy tools of money supply and interest rates.
FED decides about the monetary policy through the Federal Open Market Committee that decides about both the money supply and interest rate. FED only controls the Fund Rate which is an overnight rate that banks pay to each other to meet their reserve requirements at that FED. However fund rate is a very important rate that slowly trickles through the economy and decides the short term as well as the long term rates in the market with a lag of few months.