Question

When should the Fed change rates (raise or lower)? How has their attitude recently changed?

Answer 1

Fed should lower rates when the economy is in recession and it needs a boost in terms of consumption & investment. Lowering rates, encourages firms and households to borrow more funds and make expenditures of different nature. It gives pace to the economic activities.

Fed should increase the rate when the economy is overheating and inflation is rising. In this case, rise of the rates, will discourage consumption and price stability in the economy, will be achieved. It is the part of contractionary monetary policy.

Recently, Fed has increased the federal fund rate (FFR) slowly, with control or rates remaining unchanged on few occasions. It has happened, because inflation is going to be ahead of inflation rate target set by the Fed. Hence, to control the price level, Fed is slowly increasing the FFR.