Future of Interest Rates Interest rates are one of the most important aspects of our economy and maintaining consistency is especially important in this time of steady, sustained growth but also domestic and global uncertainty.
Currently, the US market is strong and projected to continue to be strong.
On the other hand, certain potential non-economic factors cause a lack of predictability in the global market as well as our own markets and this means keeping interest rates consistent is the best course of action.
The US economy recently hit a 50 year low in unemployment, demonstrating a surge in the job market.
As consumers drive the economy, making up 70% of economic activity, consumerism is a key indicator to look at when determining monetary policy. While it is true that consumer spending is slowing, it is still increasing and not a major concern as consumer confidence remains high.
The average consumer’s confidence in the economy is elevated which enables us to forecast free spending in coming months rather than increased saving. With a low unemployment rate, a strong stock market, and a robust job market, consumer confidence is high, making economic growth inevitable. According to Harriet Troy of the “Wall Street Journal,” the GDP growth rate is projected to settle back to a rate of 2% which is a sustainable growth rate for a developed country.
While the growth rate is slowing down, this is also not concerning because if the growth rate is too high, we face the potential for an economic crash.
If the US maintains interest rates between 1.5% and 1.75%, we are projected to have continued growth in the US economy, according to Donna Borak of CNN. Constance Hunter, a chief economist at KPMG said: “The reason things are looking more positive now is due to the Fed,” indicating that current Fed policy is effective and does not need to change. Due to the fact that we have an upcoming election and potentially a new president. It is especially important to keep interest rates stable to help our economy weather the effect of any changes in our leadership.
With regard to current worldwide instability and resulting volatility in the global markets, I recommend that we be reactive in our policy decisions during this period of uncertainty. Instead of attempting to proactively predict how our economy will be affected by the global economy, it is best to keep interest rates stable and then choose the best monetary policy reaction when and if important foreign changes occur.
For example, as of January of 2020, the US and China entered a trade agreement. In which China has agreed to purchase $200 billion in goods from the US. While the US agrees to reduce by half the tariff imposed on imported Chinese goods.
Paul Christopher of Well Fargo says that “China is reorienting its growth to domestic sources,” indicating that the Coronavirus could impact China’s ability or willingness to honor our trade deal. This could decrease how much we sell to China, but it is unclear how China’s recovery is likely to progress. This being said, it is the best policy to maintain consistent interest rates. As our economy is currently operating at an efficient level and there have yet to be any major threats.
According to Mary E. Lovely, a senior fellow at Peterson Institute for International Economics, “How is the US going to handle this? We really do not know.” Lovely, whose focus is on international economics, confirms the notion of uncertainty as to how this global problem will affect the US economy. With this in mind, the best course in terms of monetary policy is to react to changes in the world economy as they occur rather than try to predict the future and make any changes based on that potential future.
Even if we were to be proactive in predicting future economic changes. I still do not think that changing the interest rates would be the best move. I think that, if we start to lose money in the economy because of the trade deal with China falling through or some other reason (and the potential downturn of consumer confidence that may cause), decreasing the discount rates would be the best way to pump more money into our banking system and prevent a recession.
Finally, it is important to consider that we are living in a world of unprecedented uncertainty.
Climate change and terrorism pose tremendous threats to domestic and global stability. From the forest fires in Australia to the extermination of a high level commander in the Middle East. As a result, the potential for catastrophic occurrences is real. This new reality also supports a monetary policy that fosters stability and counts not on predicting the uncertain future. But on making sure we can react quickly when and if we face events that could threaten our economy.
As far as the most advantageous role for the Federal Reserve, the best course of action for the US economy. In regard to monetary policy is to maintain the current interest rates. We face many noneconomic uncertainties that are nearly impossible to predict; therefore, we should not guess at these potential factors. What we know is that, in the absence of the unexpected. Moroever, maintaining low interest rates will promote a healthy economy. And allow us to take advantage of the strong growth and consumer confidence we are now experiencing in this country. Let’s do that while we can.
Future of Interest Rates Written by Peter Lena
Work Cited
Associated Press. “US Consumer Spending Slows as Overall Economy Cools.” Whittier Daily News, Whittier Daily News, 4 Feb. 2020, www.whittierdailynews.com/2020/02/04/us-consumer-spending-slows-to-0-3-gain-in-december/.
Barro, Josh. “The Markets Don’t Know What to Make of Coronavirus Yet.” Intelligencer, Intelligencer, 4 Feb. 2020, nymag.com/intelligencer/2020/02/the-impact-of-the-coronavirus-on-the-u-s-economy-is-unclear.html.
Borak, Donna. “Fed Keeps Rates Steady, Monitoring Coronavirus.” CNN, Cable News Network, 30 Jan. 2020, www.cnn.com/2020/01/29/economy/federal-reserve-interest-rates-january-decision/index.html.
“Fed’s Bostic Says New Virus Hasn’t Changed His Outlook.” CNBC, CNBC, 4 Feb. 2020, www.cnbc.com/2020/02/04/feds-bostic-says-new-virus-hasnt-changed-his-outlook.html.
Horsley, Scott. “Trump Signs ‘Phase 1’ China Trade Deal, But Most Tariffs Remain In Place.” NPR, NPR, 15 Jan. 2020, www.npr.org/2020/01/15/796305300/trump-to-sign-phase-one-china-trade-deal-but-most-tariffs-remain-in-place.
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Pramuk, Jacob. “Trump Signs ‘Phase One’ Trade Deal with China in Push to Stop Economic Conflict.” CNBC, CNBC, 16 Jan. 2020, www.cnbc.com/2020/01/15/trump-and-china-sign-phase-one-trade-agreement.html.
Robb, Greg, and Jeffry Bartash. “Fed Leaves Key Interest Rate Unchanged, and Is Keeping a Close Eye on Coronavirus.” MarketWatch, 30 Jan. 2020, www.marketwatch.com/story/fed-holds-benchmark-interest-rate-steady-sees-economy-growing-at-moderate-pace-2020-01-29.
Swanson, Ana. “Coronavirus May Delay Hard-Fought U.S. Trade Wins in China.” The New York Times, The New York Times, 3 Feb. 2020, www.nytimes.com/2020/02/03/business/economy/coronavirus-china-trade-economy.html.“The Conference Board Consumer Confidence Index Increased in January.” The Conference Board, www.conference-board.org/press/consumer-confidence-index-january-2020.
