The Committee should not raise the Federal Funds Rate

The Committee should not raise the Federal Funds Rate

The Federal Open Market Committee (FOMC) should not raise federal funds rate by a percentage point because of stock market volatility and uncertainties in the performance of global economies. The United States economy is yet to fully recover from the devastating effects of 2008 financial crisis. This is reflected in the latest data on the GDP performance. America’s GDP grew at less than 0.7% in 2015, indicating that the economic environment is not viable for a percentage interest rate rise (Reuters 1).

A percentage hike in interest rates implies that the consumers in the United States will not access low-cost mortgages. In fact, the minute rise in December has impacted negatively on borrower’s expectations. This year, the economy is expected to grow at an average rate of 2.3%. However, a percentage raise of federal funds could reverse such gains. It is notable that the American economy is still vulnerable to the tremors induced by a stagnating European economy and China’s slow-down. While a modest wage growth can help elevate the level of consumer spending, uncertainty lingers on US’s ability to bounce back from a recession (Ahmed 1).

During January alone, the oil prices fell below $28 a barrel. Besides, the dollar value has appreciated significantly over the past few months. Therefore, FOMC rapid rate hike is not only unrealistic but also, a counter effort to keep the inflation above 2% annually. If energy and food prices are not factored, the inflation rate still stands at a mere 1.33%. On the other hand, Dow Jones has performed poorly since august last year. At one point in January, it registered a loss of -500 points—the lowest in more than a decade (Gensler 1). As such, the volatility in the US stock market (analysts fear it is becoming a new normal) is enough for FOMC to reconsider their stance on a 1% rate rise.

Works Cited

Ahmed, Kamal. "The Global Impact of the US Interest Rate Rise". BBC 2016:1. Web. 10 Feb. 2016

Gensler, Lauren. "Cautious Feds Keep March Rate Hike in Play". Forbes 2016:1. Web. 10 Feb. 2016.

Reuters. "US Economy Hits Soft Patch In Fourth Quarter As Inventories, Trade Weigh". CNBC 2016: 1. Web. 10 Feb. 2016.