US Federal Reserve Policy makers and the Federal Funds Rate By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

September 15, 2015 | Posted by bobbysrinivasan << back to blog

Janet Yellen, the US Fed Chairperson, announced a while ago that the business and investment climate is very favorable to nudge up the fed funds rate which is currently at 0.25% and has been there for well over 6 years. But the recent devaluation by China, its currency Renminbi by approximately 4% seems to create the possibility that the Fed may postpone its decision again William Dudley. Head of the New York Fed said and I quote “The case for tightening in September seems less compelling to me now than it was a few weeks ago”. Atlanta Fed President seems to hold a different view; he said and I quote, “I expect the normalization of monetary policy – that is interest rates – to begin sometime this year. It appears as though that consensus does not exist”.

Official growth data released this week showed that the economy grew more quickly than estimated in the second quarter rising by 3.7%. The future prospects of stronger growth and higher rates in the US could trigger capital flight from weakening emerging markets as well as currency gyrations and future market instability. This will infact push up the US dollar higher dragging on US exports lower. Yet another related issue is the US inflation picture. It has dipped significantly as commodity prices are slumping thanks to faltering China’s demand and generous supply. To add to the volatility, nearly 1 trillion US dollars have moved away from the emerging markets to the developed markets in the last 13 months.

Finally Ms. Yellen had gone to great heights to convince the market that she is ready to nudge up the short-term interest rates. It is not clear whether this will happen now. If they don’t the officials may target early 2016.

Finally, the global economy appears to be slowly drifting to a major slowdown possibly leading to a deflation. So moving up the interest rates could create all major new issues including foreign currency decimation and the stock market collapse. On the other hand, if the interest rate stays stagnant, it will embolden those investors who argue that the US economy is simply not ready for higher rates.

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