The interest rate decision is set for later this week, and with an increase almost a foregone conclusion, it's time to ponder if America is ready
According to analysts, the current robustness of the labor market is responsible for the 5 per cent unemployment rate, a level that they say is among the lowest it can possibly fall to. Also, formerly frozen wages have risen by upwards of 4 per cent in the third quarter of 2015, indicating the gradual disappearance of slack in the labor market.
Taken together, these figures point to an apparently healthy economy. A closer look at the details paints a subtly different picture, though: The speedy rate of rise in wages can taper off since workforce participation in the 25- to 54-year-old demographic is at its lowest level since 1984, and the Federal Reserve System’s current inflation measure is at 0.2 per cent (way below its target of 2 per cent).
Federal Reserve Board chair Janet Yellen noted that several factors – including less scope for oil prices to drop and cheaper imports – indicate accelerated inflation in 2016, which can precipitate an interest rate rise estimated by the Fed to be around 1.5 per cent (compared to the 0.85 per cent projections by traders) by the end of 2016. Yellen said that starting early would keep the journey smooth, while sudden rises later down the line might scare markets.
Analysts said that such a rise in interest rates would have little effect, if any, on spending, as fixed interest rates in most American mortgages protect consumers from abrupt shifts in monetary policy. Also, investments are not expected to slow down much, as a rate rise would indicate a healthy American economy, which in turn can stimulate more investments.
Taken together, these figures point to an apparently healthy economy. A closer look at the details paints a subtly different picture, though: The speedy rate of rise in wages can taper off since workforce participation in the 25- to 54-year-old demographic is at its lowest level since 1984, and the Federal Reserve System’s current inflation measure is at 0.2 per cent (way below its target of 2 per cent).
Federal Reserve Board chair Janet Yellen noted that several factors – including less scope for oil prices to drop and cheaper imports – indicate accelerated inflation in 2016, which can precipitate an interest rate rise estimated by the Fed to be around 1.5 per cent (compared to the 0.85 per cent projections by traders) by the end of 2016. Yellen said that starting early would keep the journey smooth, while sudden rises later down the line might scare markets.
Analysts said that such a rise in interest rates would have little effect, if any, on spending, as fixed interest rates in most American mortgages protect consumers from abrupt shifts in monetary policy. Also, investments are not expected to slow down much, as a rate rise would indicate a healthy American economy, which in turn can stimulate more investments.
