The Fed and Three Big Questions

The Fed is wrestling with three big, intertwined questions today:

1.   How many people want jobs? - Seven years into the recovery, the unemployment rate has fallen to a low 4.9% but the picture doesn’t look quite right, since those actively seeking work is lower than normal. By keeping rates low, more people could be drawn back into the work force.

2.   How low are interest rates? - The Fed cut its benchmark by 5% in response to the great recession, expecting 5 points of stimulus.  Now the Fed is increasingly convinced that it has become more like 3% of stimulus.  Global rates are in a swoon from a glut of money or the absence of attractive investment opportunities.

3.   What damage is done by doing nothing? - The Fed usually increases rates because it fears inflation but inflation remains sluggish. But they are also worried about creating future financial crises since low rates are intended to encourage financial speculation.