Analysis

ANALYSIS 5

Granville, K. (2015). Why December Is Looking Likelier for a Fed RateIncrease.

This is an article that was written by Granville for New York Timesand it highlights some of the reasons as to why the central bank ofthe United States is considering a rise in the interest rates. Thearticle gives statements from the members of Fed, who are expected toannounce a rise in the interest rates within the month of December,2015 (Granville, 2015). According to the Federal Reserve Systemmembers, it is clear that the economy of the United States is stableto enough and borrowing costs should be increased. The economy wasassessed in terms of the unemployment rates which are at 5%. This isconsidered as full employment by Fed. Additionally, Fed states thatthere has been a considerable growth in job confidence which is anindication of a performing economy (Granville, 2015). According toFed, increasing the borrowing rates will shield the economy againstfuture inflation effects. The author of the article asserts that therise in the interest rates might send the markets into a frenzy henceleading to low bargaining by employees for better wages.

Additionally, the article postulates that the increase in theinterest rates will have different effects on different people. Onthe side of the people who are saving, they will have high returns ontheir savings. However, for the mortgage borrowers, the cost of themortgage will be extremely high (Granville, 2015). The Fed had notraised the interest for the last seven years and according to theauthor, 2015 has been the best year for the Fed to consider a rise inthe rates. It is worth noting that despite the stable economy, thereare some sectors such as housing and the hourly wage that remainspotty. The article clearly points out the fact that the chairpersonof Fed said that rates might go up but there is no decision that hasbeen made (Granville, 2015). Aspects such as the employment, hourlywage and others are being handled by the relevant committee. This isbecause such aspects are essential in the determination of a stableeconomy.

The article presents the accounts of various people at Fed. It isclear that every member is in support of the increment of the rate.However, one aspect that comes out clearly in the article is the callupon Fed to take the steps with caution. According to the chairpersonof Fed, the rates will be implemented gradually with an interest rateincrement of 1% (Granville, 2015). This will ensure that the economydoes not experience shocks. Other aspects that will considered in thedetermining the interest rate is the Chinese economy, oil prices andthe US market stock prices. The Chinese economy has dropped and theinternational oil prices have also declined which is an indicationthat the global economy is also stabilizing (Granville, 2015). Thearticle brings out the need for the international economy in thedetermination of the interest rates in a country.

The article has presented some views by some Federal Reserveofficials such as Lael Brainard who asserts that the economy needs tobe given sufficient time to recover fully. The low interest rateshave been vital in reviving the economy and the official argues thattaking away that support prematurely might be detrimental to theeconomy (Granville, 2015). In other words, this Federal Reserveofficial is asking for more time for the economy to stabilize beforeembarking on raising the interest rates. Majority of the FederalReserve officials have been influenced by job numbers in theirdecision of an interest rate hike (Granville, 2015). For instance,the article points to the deputy president of Federal Reserve Bank ofNew York who was opposed to the rise but later changed his mind as aresult of the job numbers in October 2015.

The president of the Federal bank of Chicago, Charles Evans, statesthat the rise in interest rates is not an issue, but the mostimportant is the path that the interest rates will follow. Thepresident calls for a slow and gradual increment of the interestrates towards the normalization process that the Fed is seeking(Granville, 2015). Another aspect that comes out clearly is the issueof communicating the intended interest rates increment. It is clearthat the markets are supposed to be told early enough and should alsobe prepared for the changes. The chairperson of Fed is aware of thisand it is stated that the reason that the interest rates have beenannounced long before their implementation. It is worth noting thatin 2013 when the then chairman of Fed announced that the central bankmay consider it quantitative easing, there were immediate effects onthe market (Granville, 2015). The bond prices and the stocks wentdown sharply during the announcement. This was a wakeup call for theFed officials who have taken essential steps to announce the intendedrate increase.

In my opinion, the article has presented clearly both the pros andcons of increasing the interest rates. It is also evident from thearticle that the economy has recovered and is now stable hence theneed for a rise in the interest rates. Considering that the Fed isaware of the dangers of increasing the interest rates, I believe thestrategy of a gradual annual increment is appropriate. Additionally,having informed the markets way in advance is another reason that thecentral bank should consider raising the interest rates to cushionthe economy against inflation effects in the future. Using theVasicek model of interest rates, it is clear that the market such asthe stock market is the key determinant of the changes in theinterest rates. According to this model, the best approach is to havea gradual increment that is reversible in order to reduce the effectson the market.

Reference

Granville, K. (2015). Why December Is Looking Likelier for a Fed RateIncrease. New York Times. Accessed from:http://www.nytimes.com/interactive/2015/business/economy/fed- interest-rates.html?_r=0