Political Turmoil Affects Federal Reserve Decisions

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When the Federal Reserve announced this week that it was not going to raise interest rates in September, 2015, they attributed their decision to low rates of U.S. inflation and economic growth, as well as the global slowdown. This was an obvious reference to the slowing Chinese economy, although it is very rare for the Fed to specifically reference foreign economies in their decisions. However, some analysts believe that the Fed was also influenced by another factor: political turmoil in Washington, D.C.

Two of the specific political concerns that are weighing heavily on the Fed are:

  • A threatened shut down of the federal government on October 1 if Congress does not agree to defund Planned Parenthood.
  • An expected battle in Congress when they vote a few weeks later to raise the federal debt ceiling. This has the potential to leave hundreds of thousands of federal employees unemployed until the issue is resolved, hurting the economy in the crucial few months leading up to the holiday shopping season.

In addition to deciding not to raise interest rates, there were other interesting developments that came out of the September Fed meeting. One in particular was that an unnamed Federal Reserve policymaker has suggested that zero interest rates are not low enough and the Fed should go with negative interest rates. It is suspected that this suggestion was made by Narayana Kocherlakota, who is the president of the Federal Reserve Bank of Minneapolis.

Federal Reserve Chair Janet Yellen stated that she continues to support keeping interest rates low, explaining that “the main thing an accommodative monetary policy does is put people back to work.”   However, she also said that a rate hike is likely to happen this year … which could mean in either October or December.

On the other hand, the political turmoil mentioned above could prevent a rate increase, particularly in October, if the government does experience another shut down or has a prolonged battle over raising the debt ceiling.  In either of these situations, it is likely that the Fed will wait to make a decision until after the political turmoil is resolved.

http://abcnews.go.com/Business/wireStory/latest-protesters-fed-warn-rate-hike-33833801

http://www.bostonherald.com/news_opinion/national/2015/09/the_latest_political_turmoil_another_risk_for_fed

#FederalReserve #InterestRates #PoliticalTurmoil


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