Should The Federal Reserve Raise Interest Rates This December (2016)?

Try to ask an economics tutor Singapore whether the Federal Reserve should raise interest rates this December (2016) and the answer you will get will depend on the  economics tutor Singapore you ask. The federal funds rate has remained at 0-0.25% from December 2008 to December 2015. In December 2015, the Federal Reserve raised the federal funds rate from 0-0.25 per cent to 0.25-0.5 per cent. The general consensus is that the Federal Reserve will further raise the federal funds rate from 0.25-0.5 per cent by another 25 or 50 basis points this December (2016). As an economics tutor Singapore providing ‘A’ level economics tuition myself, I do not think that the state of the world economy warrants a rate hike.

Weak Economy

It is true that the U.S. economy has largely returned to normal. However, it is also true that the U.S. economy is growing near the lower end of its normal economic growth rate of between two and three per cent. A rise in interest rates in the U.S. will reduce the growth of consumption expenditure and the growth of investment expenditure. One can consult a good economics tutor Singapore to understand the effect of a rise in interest rates on consumption expenditure and investment expenditure. When this happens, the growth of aggregate demand will slow down which will cause economic growth to fall below the normal rate of between two and three per cent. Therefore, the Federal Reserve should not raise interest rates in December (2016).

Low Inflationary Pressures

In addition to a weak economy, inflationary pressures in the United States are low. As discussed earlier, a rise in interest rates in the U.S. will reduce the growth of aggregate demand which will lead to lower inflation. However, in the absence of high inflationary pressures, there is no rush for the Federal Reserve to raise interest rates. This is particularly true in view of the fact that the labour market is still weak. Although the unemployment has fallen to 4.6 per cent in November, it is largely due to the increase in the number of discouraged workers. An experienced economics tutor Singapore can explain to you the relationship between unemployment and the size of the labour force.

Deceleration of the Chinese Economy

Although the Chinese economy has been growing since the global economic recovery in 2010, the pace of growth has been slowing down. In other words, the Chinese economy has been decelerating. If the deceleration continues, as the Chinese economy is the second largest in the world, the growth of the world economy will slow down. A rise in interest rates in the U.S. which will slow down economic growth will worsen the problem. One can sign up for an economics tuition class conducted by a good economics tutor Singapore to learn the relationship between the Chinese economy and the world economy.

Brexit

The exit of the UK from the European Union has created a great deal of uncertainty in the UK economy. This has discouraged a large number of multinational corporations to invest in the UK economy. In addition, as the UK government triggers Article 50 of the Lisbon Treaty and exit the European Union in time to come, the UK’s exports will fall which will dampen the economy. As the UK economy is the fifth largest in the world, this will have a significant spillover effect on the rest of the world which may result in a global recession. A rise in interest rates in the U.S. which will slow down economic growth will worsen the problem. Economics Cafe provides economics tuition Singapore which can help you better understand the effect of Brexit on the world economy.

Donald Trump

In an unexpected twist of event, the Republican presidential candidate Donald Trump won the presidential election, largely because of his inflammatory campaign rhetoric. There is a real chance that Donald Trump will carry out his extreme campaign rhetoric when he assumes office in January 2017. In the event that this happens, his anti-trade policies could very well plunge the U.S. economy into recession. A rise in interest rates in the U.S. will worsen the recession. As the U.S. economy is the largest in the world, this is likely to plunge the world economy into recession.

Christopher Lau

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