The US is going to have its next monetary-policy
review on March 14 – 15 and the Fed Chair Ms Yellen has aired in her recent
interaction that it is likely that the Fed would increase rates in the sight of
higher inflation and inflation expectations and full-employment and higher
wages, demand and growth. The latest inflation reading is around 1.9 % after
above 2% figures in the preceding two months, the economy is also close to
full-employment, the wage pressure is building up and the economic growth-rate
has increased to 1.9%, though lower than before, which the Fed says might form
the base for future rate hikes following the incoming data. However, the Fed
had said that rate hikes would be gradual in the prior communications which was
missing in her latest words, but hope hikes would be data dependent in order to
be consistent and less confusing. Nevertheless, the Fed is trying to increase
wage and wage expectations and interest rate hike and expectations, by
increasing inflation and inflation expectations which it at the same time would
try to control by increasing the Fed Funds rate in the future, however higher
oil-prices are major contributor to higher inflation and inflation expectations
which have showed firmness in the recent months. The Fed is trying to increase
nominal wages and interest rate and expectations by increasing inflation and
inflation expectations, but the economy would lose demand and savings by
targeting inflation because real wages and interest rate would go down, by
targeting inflation it is cutting on real wages and interest rate and that is
likely to reduce demand and savings and the economic-growth. It argues that by
normalizing interest rates it would reward savings better, but higher inflation
and nominal interest rate in the future would lower demand, consumption,
savings and investment spending, and the economic-growth rate. Nonetheless, if
the Fed continues with accommodative stance and commits lower interest cost and
prices it would lead to the same outcome, higher demand and economic-growth,
lower borrowing cost would reduce the overall cost and would increase the
economy’s competitiveness and demand, but by increasing nominal interest rates
it could increase some inflation by restricting investment and supply. The US
economy is trying to generate inflation to increase nominal interest rate, but
it would lower real interest rate which might reduce savings and investment,
similarly lower real wages would reduce consumption, both resulting in less
spending and economic-growth. Higher inflation and nominal interest rate and expectations
about them would reduce demand and growth. The US’ rate of population growth
rate decides its rate of potential expansion
or economic-growth after accounting for natural unemployment and that is around
5%, the population growth rate is 10% and the frictional or natural rate of
unemployment is 5%. The economy has barely touched that rate in past after the
Great Recession and the Fed might target higher growth rate instead of higher
inflation like China and lower borrowing cost and prices or inflation might help
increase demand and growth. Though, higher oil prices have helped achieve the
inflation-target, but the potential of shale-oil and the US’ joining of the oil
market might increase employment and may also help achieve price-stability,
when the oil-cartels have cut back on supply which may help increase oil-prices
and shale oil production, higher prices would make its production feasible when
lower borrowing cost would reduce the cost of investment. The shale-oil
production has the capacity to bring back jobs lost in coal mining…
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