The Federal Funds Rate (FFR) is designed to either stimulate saving or spending based on the level of economic growth. Following the 2008 financial crisis, the rate was slashed in attempt to temporarily buoy the markets, but the current economy is calling for an increase in the rate. The series of rate increases proposed by the Federal Reserve were set to be enacted sometime around fall of 2015, although more recently analysts predict that the September 16-17 meeting specifically will reflect any actions taken by the central bank. This rate hike, planned for quite some time now, is becoming increasingly ambiguous as the Fed faces tension following the recent succession of turbulent economic events. Chief among these stressors is the IMF, which is urging the Federal Reserve to cut a little slack for the sake of the global economy.
The United Kingdom’s central bank had also made plans to raise rates in the near future, possibly as soon as its September 10th meeting. With the U.S. and the U.K. being the frontrunners for rate hikes, the IMF has stated that, “in most advanced economies substantial output gaps and below-target inflation suggest that the monetary stance must stay accommodative.” Simply put, the Fed is being asked to hold off the FFR increase for longer than previously planned. Despite prior intentions for the rate hike, the IMF’s requests are not as unsubstantiated as they might have been just months ago.
Traditionally, it is the Fed that is responsible for American monetary policy, whose standards are mandated by congressional committees. The goal, while taking the various stock exchanges into account, is to maximize employment and stabilize prices. Despite the FFR remaining stagnant at the rock bottom that it is at currently, things are already looking up without the added boost of a rate increase.
Stateside, unemployment has dropped since 2008, and growth has been maintained above 3% on an annual basis for a majority of the past five fiscal quarters. America’s wages and inflation seem stable enough for the time being and there are not many additional signs of its economy internally combusting anytime soon. Moreover, bond yields in emerging economies have climbed since earlier in the year, in addition to the currency depreciation caused by the Chinese market crash. A contracting monetary policy by the Fed would likely stifle global economic growth, if enacted prematurely. It seems that the benefit of hiking the rates is greatly outweighed by the need for the U.S. to slow its plans, only if for another quarter.