The Federal Reserve has not increased their interest rate since 2006. According to a March
23 Business Insider article, policy makers have been discussing the policy changes that
would need to take place if this increase in interest rates were to occur in a meeting by
meeting basis. The Fed has been taking cautionary steps in order to jump into this increase,
but Janet Yellen insinuated that the central bank would not be prepared to make this jump
until later in the year. As of April 29, there have not been set plans on the interest rate
increasing Yellen citing that the cold winter tends to hinder economic growth in part
because of transitory factors. Stanley Fisher, the second-in-command of the Fed behind
Yellen, said, “It is well expected that the rate will lift off before the end of this year.”
Additionally, Fisher used the strong economic process and a high employment rate as
actions that will aid in the detraction of the money supply if and when the Fed implements
this policy. He said, “[it] will almost certainly not be realized, because, inevitably, the
economy will encounter shocks.” Adding that this is not a permanent adjustment and
interest rates will move up and down in the future, but acknowledging that the strength of
the dollar may offset the actions put into play by monetary policy. Fisher believes this plan
will have a smooth transition, but acknowledged some risk with its overnight reverse
repurchase program. Overall, Fisher has laid the groundwork for an increase in interest
rates starting at the end of this fiscal year.
Theory Review and Analysis
As our economy has been booming in recent years after the recession that began in
December 2007, businesses have increased in value, consumers have more disposable
income, and minimum wage has even increased. This in and of itself illustrates the
expansion of our economy. Although this sounds like a positive occurrence, periods with
high expansionary growth often end with the “popping” of the bubble and a strong
recessionary period. In order to combat this period of high economic growth, the Federal
Reserve is looking to put contractionary monetary policy in play to downplay the
expansion that is taking place. The article suggests that in the near future the Fed plans to
increase interest rates to assist in the restriction of this expansionary period. The Federal
Reserve feels confident in putting contractionary monetary policy in play because they
