Question

The federal open market comittee plans to raise the federal funds rate to at least 2% by the end of the year.

Given the current conditions, is this a good idea? Give a detailed Explaination.

Answer 1

To understand this it is necessary to understand that how the federal funds rate works .when federal bank wants to curb inflation,Federal Open Market Committee increases the federal fund rate due to which banks borrow less money to keep their reserve at mandated level and due to it it lends less money .

now if we look at inflation rate of last few year

year	Inflation rate
2015	0.12
2016	1.28
2017	2.65

So if you look at the table you will observe that inflation is increasing more than 100% each year and target inflation rate is 2% and current inflation is above 2% so it is required that contractionary monetary policy should be adopted to curb inflation so it is right to increase federal fund rate by 2%.