What Data is the Federal Reserve Looking At?
When the financial crisis hit in 2008–2009 the Federal Reserve slashed the “Federal Fund Rate” (the rate at which banks lend money to each other) from around 5.25% to 0.25% which is effectively zero.
Interest rates remained at close to zero percent for nearly seven years. As illustrated in the following chart.
The reason the Federal Reserve slashed rates was to help stimulate the economy following the financial crisis.
The cheaper money is to borrow, the more businesses and consumers will borrow money to invest and buy things, effectively giving the economy a shot in the arm.
The monetary policy implemented by the Federal Reserve over the past decade has achieved its objective as the U.S economy is running near full capacity and unemployment is at record lows.
Since the economy no longer needed this monetary stimulus, the Federal Reserve began increasing rates again starting in 2015. It did this for several reasons but two, in particular, stand out to me.
- To avoid “overstimulating” the economy which would lead to inflation
- By raising rates while the…
