What Is The Fed's "Gradual" Increase In Interest Rates?

"What does Fed officials mean by raising interest rates?" when reporters threw this question to Charles Collins, chief economist of the international financial association, he paused and said, "Er, this problem is big enough!" this year, the Fed officials have repeatedly declared that this year is the year of raising interest rates in public speeches and media interviews. At the same time, they also stressed that the Federal Reserve would increase interest rates at a gradual pace, but never explained clearly the meaning of "gradual" two words.

All in all, "gradual" means more to distinguish from the Fed's previous interest rate cycles. Yellen will not raise interest rates at every meeting in accordance with mechanical means, but how to raise interest rates at all times is still unknown, because the US economic outlook, inflation situation and financial market reaction are still full of uncertainties.

But Corinth is bold enough to give its own guesses.

He expects the Federal Reserve to raise interest rates only two times next year, in June and December of next year, because he believes that global economic growth will not be so strong next year, the growth of the emerging economies and the further appreciation of the US dollar will bring "adverse wind" to us economic growth, which will make the Federal Reserve take a more cautious attitude towards the subsequent increase in interest rates.

According to the Federal Reserve Fund released this month, the federal funds rate forecast median, the United States will gradually increase interest rates to 3.25% in the next 3 years.

If calculated at 25 basis points per raise, this means that the Federal Reserve will raise interest rates by 4 times in 2016 and 2017, and increase interest rates by 3 to 4 times in 2018.

In Corinth's view, this pace of interest rate represents, to some extent, the views of most Fed officials on "gradual".

Corinth explained that in the last cycle of interest rate increase from 2004 to 2006, the Fed announced 25 basis points for raising interest rates at the regular meeting of the monetary policy. The Federal Reserve held 8 monetary policy meetings a year and accumulated 200 basis points for interest rates. According to the expectations of most Fed officials, the Federal Reserve will raise interest rates once a quarter, with a cumulative rate of 100 basis points a year, equivalent to half of the last round of rate hike.

Lockhart, President of the Federal Reserve Bank of Atlanta, also confirmed this view in his recent media interviews.

He said that the gradual increase of interest rate means that the Federal Reserve will not be in every time.

Interest rates were announced at the meeting.

He believes that the possibility of increasing interest rates in the future is to raise interest rates once every other time.

Lockhart is a centrist, and his policy stance is often consistent with the consensus of the Federal Open Market Committee, the Federal Reserve's decision-making body.

According to the Fed's agenda, the Federal Reserve will hold the next two monetary policy meetings in January and March, so many market participants begin to speculate that the Federal Reserve will start the next rate hike next March.

But Williams, governor of the Federal Reserve Bank of San Francisco, did not agree with this conclusion hastily.

He said Federal Reserve officials' interest rate forecasts were based on their expectations of the US economic trend in the next two or three years, but the actual trend of the US economy in the past few years is not always consistent with the Fed's expectations.

What Williams emphasized is that if the actual trend of the US economy fails to move towards the direction expected by the Federal Reserve, the Fed's interest rate plan will also change.

Over the past few years, the Fed has habitually overestimated the dynamics of US economic growth and inflation and underestimated the decline in the unemployment rate.

According to the latest forecast of Fed officials, by the end of next year, the US inflation rate will rise to 1.6%, the unemployment rate will drop to 4.7%, and the overall economy will grow by 2.4%.

More importantly,

President Yellen hopes to avoid raising interest rates in accordance with fixed patterns or routines.

At a press conference on 16, she emphasized that "gradual" does not mean anything.

She said, "gradual" does not mean mechanical increase in interest rates, does not mean equal interval, the same rate of increase in interest rates, the Fed will adjust according to the future economic data and changes in the economic outlook.

Analysts believe that Yellen hopes to raise interest rates on the issue to avoid repeating the 2004 to 2006 when the Federal Reserve Chairman Greenspan's mistakes.

At that time, the Federal Reserve raised interest rates for 17 consecutive times, raising 25 basis points for each interest rate, raising the federal funds rate from 1% to 5.25%, but the real yield of the US 10 year treasury bonds increased by only 25 basis points over the same period, which is clear and predictable.

It did not cause the US financial environment to tighten significantly. Instead, it encouraged investors to take excessive risk speculation. It was considered by some critics to be one of the important reasons for the outbreak of the current financial crisis.

The Federal Reserve Bank of New York believes that the Federal Reserve should have tightened monetary policy more aggressively or implemented macro prudential policies to tighten the credit standards of the overheated real estate market.

Therefore, he suggested that in addition to the US economic situation, the financial market environment should also become an important factor in determining the pace of the Fed's interest rate hike.

Tim Dii, an economics professor at University of Oregon, believes that because the US job market is close to its normal level and inflation is still far below the medium and long term target of 2%, the actual inflation trend of the United States and the expectation of the US Federal Reserve to the US inflation outlook will be the key factor determining the pace of the US Federal Reserve's subsequent interest rate hike.

He pointed out that if the US dollar exchange rate and international oil prices tend to be stable, the temporary factors of reducing US inflation will gradually dissipate, which will enable the Federal Reserve to have policy space to increase interest rates gradually. But if the US dollar continues to strengthen and international oil prices continue to fall, the deflationary pressure in the US will rise, which will force the Federal Reserve to slow down the pace of interest rate hike.