Why Does The Fed Raise Interest Rates One By One And Three More?

The Federal Reserve ended the open market committee meeting in March. In addition to the vote by Carney of the Federal Reserve Bank of Minneapolis, other members voted with President Yellen to raise interest rates by 0.25%.

This is also the third increase in interest rates since the Federal Reserve started raising interest rates in late 2015, which is of great significance.

The following is a brief analysis of why the Fed needs to raise interest rates, and the author's outlook on the next step of raising interest rates.

1, why raise interest rates?

The federal reserve system includes the Federal Reserve in Washington, D.C., and the Federal Reserve Bank in the 12 regional economic center of the United States.

According to the Federal Reserve Act, the Federal Reserve System is an independent operation system without political interference.

The statutory function of the Federal Reserve is 2+1:'s two major functions, plus an additional function.

One of the two functions of the Federal Reserve is to increase employment.

From this point of view, the unemployment rate in the United States has a long-term historical average of about 5%, which is also mentioned in economics. Some of the population voluntarily leave their jobs, resulting in some unemployed people under full employment.

For the past decade or so, the unemployment rate in the United States in 2004 was 5.7%. Then, during the second term of President George W. Bush, the real estate bubble reached a historical low of 4.4%.

After 2008

The unemployment rate reached a historical high of 10% in October 2009.

Since then, the unemployment rate has been declining, and now it has returned to a relative ideal state of about 5%.

From the employment situation, the Fed should be more satisfied.

Of course, there is also a hidden worry, that is, the labor participation rate is still low.

Another major function of the Federal Reserve is price stability.

The central banks in European and American countries have an unwritten "small target", that is, they hope to achieve an inflation rate of 2%.

New Zealand is the originator of the inflation rate, and has achieved remarkable results over the years.

It seems to be generally believed that if less than 2%, social development will lack vitality, and more than that will lead to a tax on inflation.

After 08 years of economic crisis, the Fed was very afraid of entering the deflation period.

Deflation is like The Hotel California. It's hard to get out of the house once you get in. Japan's past more than 20 years are painful lessons.

Through radical quantitative easing, the Fed avoided a repeat of Japan's mistakes.

The current inflation rate is close to 2%, which is also close to the ideal state of the Federal Reserve.

The last two plus one function of the Fed is financial stability.

As the cornerstone of the United States and the world's financial system, and as a regulatory institution of the United States' systemic important financial institutions, including banks and insurance companies, the Federal Reserve has additional functions to promote financial stability.

It can also be said that every time before the major interest rate decision of the Federal Reserve,

They will consider the degree of influence on the stability of the financial system.

It can be said that these conditions have given the fed a green light, and the normalization of the Fed's interest rate has everything.

Until March 15th, the federal funds rate was still 0.5%, which was much lower than the normal rate of interest considered by the Fed, which is about 3%.

Therefore, the Fed's interest rate increase is a general direction and must be done.

2, why do interest rates slow in recent years?

After the start of every rate hike in the history of the Federal Reserve, it will generally increase interest rates continuously and continuously for more than 7 times, and at some point it will raise interest rates 0.5%-0.75% at a time.

According to the above analysis, the Federal Reserve started to raise interest rates this time, and the pace was slow, and it was 0.25% small.

I think there are many external factors that force the Federal Reserve to slow down the rate hike.

First, the US economy is indeed growing normally, but the European Union and Japan's economies have stagnated in the past few years and several times into recession.

Although the Federal Reserve is only responsible for the US economy, if the rate hike is too fast, it will have a negative impact on the US economy, once the economy of Europe and the United States is affected.

In recent years, the leverage of emerging market countries has increased rapidly, which will also be greatly affected by the Fed's excessive interest rate increase.

Second, as an independent body, the Fed can ignore political influence.

However, when major historical events such as last year's British withdrawal to Europe and the US general election took place, the Fed must take into account the impact of the black swan incident on the market and the consequences of the Fed's interest rate being misread by the media.

If the interest rate is raised before the election, even if it is irrelevant to politics, it will be interpreted as "stepping on the brakes" for economic development, leaving behind the historical burden.

In fact, the United States Congress can ask the chairman of the Federal Reserve to the Congress, and to shelling why it would raise interest rates before the election.

Based on these factors, it can be said that the Fed is sticking to its teeth and insisting on not raising interest rates.

This year is the third year of the Federal Reserve's interest rate hike. It can be said that the Fed has already walked behind the rate hike.

The Federal Reserve in Washington, the Federal Reserve and the Federal Reserve banks employ over one thousand economists who are highly intelligent and highly educated.

From their perspective, the Fed must normalize interest rates, which is the neutral level of the federal funds rate to about 3%.

However, due to various constraints in previous years, the pace of interest rate hike was slow.

On the other hand, after President Trump came to the White House, he would launch a lot of economic policies.

These policies may have far-reaching implications for the Federal Reserve. If we borrow President Reagan's history, we can say that the time limit for the Federal Reserve has been very limited.

Reagan economics is really worth reviewing again, because not only for tax cuts, for reducing supervision, but for the United States, and so on, and Trump's economic policies come from Reagan, or even earlier Coolidge (see Coolidge's economic policy in February); Reagan's history of the Fed's change is parallel to today's Federal Reserve.

Many specific details will be analyzed in the next article.

From the Fed's perspective, President Yellen will end his term in January next year, and President trump will also appoint the three Governor of the Federal Reserve Board.

For members of this fed, this is the last window of interest rate increase.

This is also related to the historical positioning of the senior Federal Reserve officials.

I remember in a Harvard Club speech last year, CEO Kaplan of the Dallas Fed said that the historical position of Bernanke, the former chairman of the Federal Reserve, was to rescue the US and the world financial system through radical quantitative easing. The historical position of Yellen, the current chairman of the Federal Reserve, has not yet been determined. Her legacy will depend on the success of the normalization of interest rates and the withdrawal from quantitative easing.

To achieve the historical positioning of success, the Fed's interest rate normalization is only this year.

The window will be closed early next year, so I believe that the rate of increase will exceed expectations this year.

Just like at the beginning of this year, the rate hike in March was expected to be only 35%. Then the Fed successfully raised the rate hike to 100%, and then raised interest rates on Thursday.

In the next few months, the Federal Reserve will continue to manage such expectations.

However, I believe the Federal Reserve will not shrink when hedging increases interest rates rapidly.

At the early stage of normalization, the interest rate of the economy is very low, and it helps the company to make profits.

In addition, the total size of the US economy has increased by more than 40% compared with that in 2008. The Fed's base money must rise, so the size of the Federal Reserve's balance sheet also needs to keep pace with the times and increase substantially.

At this point, the negative effect of the lock table is much greater than the positive effect, and the possibility of implementation is very low.

Finally, it is worth mentioning that the Minneapolis Fed's CEO Cash Carney is the first member of the FOMC voting this year and is the only one to vote against it.

Cash Carney is young and promising, and he is a Republican.

His ideas include a substantial increase in bank capital and less regulation of banking business.

Therefore, his vote is not inconsistent with President Yellen's monetary policy, but also a signal gun for the future direction of the development of the Fed.

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