Concerns over slight slowing in job growth have caused many economists to predict a delay in the Federal Reserve’s next interest rate increase, but the Federal Open Market Committee (FOMC) is confident in the economy’s steady growth. While unemployment has continued to decrease to below 5%, the number of jobs created in January has significantly decreased from an average of 279,000 in the fourth quarter of 2015 to 151,000 in January 2016 (WSJ, 2016).
The Federal Open Market Committee (FOMC) report of January 2016 specifies that the FED stands by its decision to increase interest rates to the current 0.25% to 0.50% and expects the economy to stabilize and grow (FOMC, 2016). The goal of increasing interest rates is to balance the economy. Enabling to Fed to loan money at a reasonable rate and slow over-inflation in favor of real growth.
The point at issue and concern with the rise in interest rates and necessary growth is the inability of any economy world-wide to maintain increased interest rates long-term since the 2008 financial crisis. In fact, several European countries are relying on negative interest rate stimulus to their country’s banks to avoid further financial issues and shortages (WSJ, 2015).
The FED noted microeconomic improvement in the markets, household spending and business fixed investment have been increasing in the first month of 2016. In addition, the housing sector has improved from 2015 (FOMC, 2016). In the macro-economy, net exports and inventory investment have slowed and the FED recognized underutilization of labor resources are an area for needed stimulus and development. The most significant economic issue is the inflation rate below the FED’s 2% target. The FOMC’s report attributes most of the slowing in growth to the decreasing energy prices. In addition, an aggregate decrease in the price of imports, energy and non-energy.
A full economic recovery and strong growth are the goals for the FED, businesses, economists, and the American people, but monetary policy can create changes in expectations and multipliers than can results in larger shifts in the economy. It is a positive indicator that unemployment continued to decrease and household spending increased after the FED’s interest rate increase. The rise in FED funds rate and the news of higher interest rates did not change consumer spending expectations. In fact, indicators of a stronger economy, growth, and a full recovery increased household spending.
Decreasing energy prices will slow inflation. The Committee is focusing on global economic and financial developments as the significant risk factors affecting the economy (FOMC, 2016). International economic and financial developments have significant influences on prices and real commerce. Some large domestic companies receive as much as 30% of operating revenue from overseas business. Politically, President Obama is creating new international trade agreements and working the House Speaker Paul Ryan to pass the Trans Pacific Trade Partnership (TPP) to facilitate and regulate international trade. Trade agreements have significant implications for international commerce.
The FOMC intends small gradual increases to the fed funds interest rates over time through evaluating labor market conditions, inflation indicators, inflation expectations, and international financial developments. The FED will continue to reinvest principle payments received to Treasury securities to mitigate the accommodation of low fed funds interest rates. While the fed fuds rate has increased the discount, primary credit rate, remains unchanged at 1% (FOMC, 2016).