The Federal Reserve has been considering raising the target Fed Funds interest r

Question

The Federal Reserve has been considering raising the target Fed Funds interest rate. It has delayed its decision over the past several months trying to determine if the economy is expanding. If the economy is expanding, raising the Fed Funds target rate should be beneficial to depositors and keep inflation in check. However, for every positive signal the economy is recovering, there is another negative economic indicator that offsets the positive one.

Please add your thoughts to this discussion, place yourself in the position of the Federal Reserve, what should they do?

The Federal Reserve Open Market Committee will meet on Tuesday, October 27 and Wednesday, October 28 to discuss the state of the economy. What will be the outcome, specifically, will they raise the target Fed Funds rate? What do you think?

Explanation / Answer

The raising of interest rate provides better returns to depositors at the same time checks the inflation but its also detrimental to growth because now businesses it becomes difficult or more costly for them to raise finance to expand and grow which would be detrimental to growth ,thus if economy is expanding the decision to raise rates halts this growth but at the same time checks the inflation. On the other side if the decision is to lower the rates this would only promote growth because now its cheaper and easier for businesses to raise finance and grow and augment the economic growth but this could led to uncontrollable inflation and low returns for the depositors. The federal Reserve achieve a target growth rate and target inflation according to Taylor rule,i(target)=i* + .5(Real Inflation -Inflation(target))+.5(Real growth-growth(target)) i* is real interest rate, the target inflation and growth rates are achieved by adjusting the interest rate as when growth changes or inflation is changed.A expanding economy i.e. high Real growth calls for increasing interest rates and therefore they are doing the right thing of raising interest rates and check inflation.if economy is expanding the inflation can rise too much, to check it raising interest rates is right ,but it shall hamper the growth a bit but shall check that economy does not heat up and just maintain a stable growth.

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