Wall Street Journal Paper

        While there are boundless amounts of forces that influence financial markets, the Federal Reserve hands down takes the crown for being the greatest significance. The major discussion over the past several months with the Federal Reserve is when, if ever, will they raise interest rates for the first time since 2006. For the purpose of combating the 2008 financial crisis, in December the Fed pushed its benchmark short-term interest rate to near zero an effort to spur borrowing, spending and investment in the aftermath of the financial crisis. Deciding to raise rates or not nevertheless has come at no easy task for the Fed, which has created more ambiguity for financial markets and their participants. The central unpredictability of the Fed is part due because of their independent role to conduct monetary policy. Though being independent from political views, there has been recent events both domestically and abroad that the Feds must not overlook. First, there has recently been compelling evidence where countries within the past few years have raised interest rates, but ultimately falling back to recessions shortly after. Moreover, the events such as China’s diminishing economy, a stronger dollar, lower unemployment and virtually unchanged inflation rates are all other aspects the Fed must take into account. With all the events that have unraveled themselves in the past few months, it is imperative the Fed make the right decision on whether to raise interest rates or not. Though when to make the right decision to do so has ignited volatility in the markets, demonstrating the Feds towering influence on the financial markets and their participants.

        What is very important to realize is the Fed’s independence from political and bureaucratic pressures when it formulates and executes monetary policy (as discussed on page 53 of the textbook). We have seen a huge change in the regulatory powers of the Fed throughout recent years, as well as, in earlier years since the Great Depression from 1929-1933. “The Fed’s regulatory powers have grown since the 1930s, and thanks to the 2010 Dodd-Frank financial reform, the Fed is now the country’s most powerful regulatory agency” (Gramm, 2015). With the Fed being an independent central bank, it enables their independence from day-to-day political pressures allowing the Fed to better manage their countries national economies. That being said the Fed could take short-run policy actions that may be politically unpopular but in the longer run benefits the economy’s overall macroeconomic performance. This overall independence enables the Fed to virtually do as it pleases to meet monetary policy goals.

        Most compelling evidence throughout past years is that as countries began to increasing interest rates their economies shortly after fell back to the turmoil that led the decision to raise interest rates.  As seen on page 129 of the textbook in recent years increases in interest rates by the central banks of Japan, Sweden, and European Central Bank, have poised troublesome to the countries. In Japans case, they raised rates from zero to .25% but the economy soon slipped back into recession and deflation worsened after a rate hike. As with Sweden and the European CB, both economies and inflation fell right back to levels that were identical before rates were increased. This compelling evidence must be taken into account on whether to raise rates so the Fed doesn’t make the same mistakes these countries did because it could be detrimental to the economy. Though with “the Fed’s extraordinary patience thus far has brought the economy to the point where higher rates are no longer an existential threat. And by promising that the pace of rate increases will be glacial, the Fed gives itself ample room to stop or reverse course if something goes awry” (Greg, 2015).

        As a matter of fact, for the Fed to conduct and accomplish its monetary policy goals, the Fed must take into considerable account the domestic factors of inflation and unemployment rates. In order for the Fed to raise interest rates, inflation and unemployment rates need to be fully inline with their goals. The Fed has a fixed goal of 2% inflation before they liftoff rates, but they’re running into trouble.  On page 94 of the textbook, it describes the relationship of inflation and unemployment rates: as unemployment falls in the economy, inflation is supposed to rise. “Even as inflation remains well below the Fed’s 2% target, a source of great unease for policy makers, a 5% unemployment rate for could heighten concern the Fed is dithering” (Russolillo, 2015). The unemployment has dropped from 5.1% in September, when the Fed announced a possible rate hike, to 5.0% in October (USDOL, 2015). Though at the same time, inflation has only risen to .2% in October from 0.0% in September. While this is a slight raise of inflation, it is no were close to the 2% goal the Fed needs. The other point is that even though inflation did rise the unemployment rate is at an all time low level, seen only near the years 2006-2008. Thus while the Fed needs to take into account all the domestic factors, there must be other factors globally that are affecting their interest rate hike and their goal of 2% inflation.