Question

The federal reserve discount rate increased from 1.0% to 3.0% from July 2016 to December 2018, then remained at 3.0% until July 2019 where it began dropping. As of October 2019, the current discount rate is 2.25%.

1. Why did these changes occur?

2. What's the consensus in the trends and predictions regarding these increases and decreases?

3. Should the consensus make people feel secure or anxious?

Answer 1

1.

It happened because of the change in the inflation rate and inflation rate target. Fed has kept inflation rate target to be 2%. When actual inflation rate increases to be more than 2%, then discount rate increases in the tune of increase in federal fund rate. It discourages spending and demand decreases. It controls the inflation rate. Inflation rate increased between 2016 and 2018 of the given period and discount rate increased to control it. Later on, when stimulus was decreased and inflation rate decreased below 2%, then discount rate also decreased to increase the inflation rate near 2%.  

2.

Consensus is that increase in discount rate is in tune with the increase in federal fund rate that takes place when inflation rate increases. The reverse happens when inflation rate decreases and federal fund rate decreases, leading to decrease in the discount rate. It develops consensus.

3.

Consensus should make people more secure, as it starts taking measures to correct the economy and bring stability. Besides, consensus is based on trends and predictions based on different models. Hence, it creates opportunity to become ready for the changing economic conditions. It makes people to prepare well and fee secure.