Federal Reserve is unlikely to increase the rate of interest as officials aren’t sure how much stimulus their zero-interest-rate policy is providing. Economists and central bankers are having varying views on where the rate lies in the aftermath of the worst recession since the Great Depression.
In an attempt to revive its lowing economy, Beijing cuts its one-year deposit rate by 25 basis points to 1.5 percent, lowering one-year lending rate by 25 basis points to 4.35 percent on Friday. China’s economy slowed to 6.9 percent, below from its 7 percent target, and experts are concerned that the slowdown could be more severe than predicted. Bank of Japan is also set to implement aggressive easing measures on Oct 30, when Japan Governor Haruhiko Kuroda updates its economic forecasts.
“There is a lot of uncertainty about what the appropriate level is,” said Laura Rosner, US economist at BNP Paribas, New York.
Chair Janet Yellen and her colleagues suggest that the policy will be accommodated well after the central bank begins to raise rates if the natural rate is well above the current near-zero rate, in turn fueling further investment and hiring. If the natural rate has fallen drastically or below zero, the early stages of tightening could restrain the US economy much more than the expectation of Fed officials.
A rate increase would boost the dollar, making U.S exports expensive to international buyers, but it could slow down the pace of companies with international activity as they are still recovering from the Great Recession. A strong dollar would also put additional pressure on commodities like crude oil. New York Fed President Willaim Didley said that the monetary policy isn’t as easy as people think it is, or the economy would be growing faster. That argues for a gradual pace of tightening after liftoff, he added.