Economist Mike Walden: Taking the Punch Bowl Away

The Federal Reserve in on track to raise short term interests three or four times this year, pushing the rate up to at or slightly above 2%.  Some analysts say the fear of the Fed increasing interest rates is part of the reason behind the recent volatility in the stock market.  If the Fed’s actions could hurt the stock market, why would they do it?

  1. One of the Fed’s jobs is to move the economy along at a steady rate, not too hot and not too cold.
  2. We are now in a situation where the economy has been growing for 9 years, unemployment is very low, and inflation is beginning to rise
  3. Fed is worried about the economy “overheating,” which would mean efforts to grow faster will only be eaten up by higher inflation
  4. Also, interest rates have been close to 0 for several years, which some think may have pushed the stock market up too fast
  5. So, Fed wants to head-off overheating by raising interest rates modestly
  6. often in these situations, the Fed is characterized as the chaperon who takes the punch bowl away when the party is getting to rowdy
  7. the Fed believes its actions will extend economic growth and avert an earlier recession