feldstein127_Spencer PlattGetty Images_stock market Spencer Platt/Getty Images

Why Is the Fed Still Raising Interest Rates?

Given that the US Federal Reserve has long said that its interest-rate policy is “data dependent,” why has it pressed ahead with monetary tightening in the face of worsening economic indicators? Three reasons stand out.

CAMBRIDGE – Earlier this month, the US Federal Reserve’s policy-setting Federal Open Market Committee (FOMC) voted unanimously to increase the short-term interest rate by a quarter of a percentage point, taking it from 2.25% to 2.5%. This was the fourth increase in 12 months, a sequence that had been projected a year ago, and the FOMC members also indicated that there would be two more quarter-point increases in 2019. The announcement soon met with widespread disapproval.

Critics noted that economic growth has slowed in the current quarter and that the Fed’s preferred measure of inflation (the rate of increase of the price of consumer expenditures) had fallen below the official 2% target. Given that the Fed has long said that its interest-rate policy is “data dependent,” why did it press ahead with its previously announced plan to continue tightening monetary conditions?

The FOMC statement announcing the latest interest-rate hike gave no explicit reason for it. Fed Chair Jay Powell’s remarks at his press conference also gave no reason for maintaining the originally planned rate increase despite the economic slowdown.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

http://prosyn.org/s6DHGj0;
  1. abe10_TIZIANAFABIAFPGettyImages_shinzoabesmilingatcamera Tiziana Fabi/AFP/Getty Images

    The G20 in Osaka

    Shinzo Abe

    Japan is advocating a system of “Data Free Flow with Trust,” an approach that attempts to allow the free flow of data under rules upon which all people can rely. And launching DFFT is just one of four major agenda items that Japan's prime minister has in store for the group's upcoming summit.

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.