The Fed Takes a Hike

Larry Jia, Staff Writer

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The AP Economics and VCU Business classes took a field trip to the Federal Reserve Bank in Richmond earlier this year.

Photo courtesy of Dr. Julius Oreska
The AP Economics and VCU Business classes took a field trip to the Federal Reserve Bank in Richmond earlier this year.

Lately, headlines reporting activity surrounding the Federal Reserve have centered on two major points: rate hikes and campaign contributions. During a news statement on Wednesday, the Federal Reserve Chairman Janet Yellen expressed the Fed’s intention to raise rates, while also providing an uncertain economic outlook concerning the international community. Additionally, the Federal Reserve has come under fire lately for partisan campaign donations, which threatens the nonpartisan reputation of the Fed.

On Wednesday, March 16, 2016, the Federal Reserve Bank Chairman Janet Yellen stressed the importance of interest rate hikes in the coming fiscal year. After approximately half a decade of overall strong economic growth, with the GDP growth rate hovering at 3% and the unemployment rate officially under 5%, the Fed eyes interest rate hikes in the face of a faltering global economy. Yellen indicated that the Federal Reserve intends to tighten its policy with two 0.25% rate boosts by the year’s end. In a statement on March 16th, the Federal Reserve noted that, “A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months. However, global economic and financial developments continue to pose risks.” Other indicators of overall economic strengthening include the volatile energy and food sectors, which the Chairman will examine for core inflation.

Current economic policy is a change from the original outlook at the beginning of 2016. Expecting weak economic growth and lower inflation, targeted lending rate outlook was lowered to 3.3% from 3.5%. Especially in December of 2015, when the Fed raised interest rates for the first time in nearly a decade, the original prediction of four interest rate hikes has been lowered to two hikes total. Along with overall strong domestic growth, the negative outlook signals a tepid international market. For example, Venezuela, Greece, Brazil, Russia and even economic powerhouse, China, have experienced significant volatility, averaging 1.2% gains and losses per day. Many of the aforementioned nations rely on energy-based exports, such as petroleum, ore, and natural gas industry. Specifically, the petroleum industry encountered a free-fall in the past fiscal year, as it experienced high 80% losses. Wealthy nations have also endured problematic energy market, as Saudi Arabia relies on accumulated state funds to counteract daily losses due to the price of oil. It was estimated by the International Monetary Fund that with current oil prices sustaining, Saudi Arabia would exhaust funds by 2018. Thus, the international market poses significant issues in attempting to predict future rate hikes at the Federal Reserve. The domestic economy may have been on a course to recovery, but the global economy might be going down the hole.

The Fed Chairman on March 16 noted that, “We are a non-partisan, independent institution devoted to pursuing our congressionally-mandated objectives. I have never seen political views in any way influence the policy judgements that are made inside the Federal Reserve. I want to say that emphatically.” The criticism stems from a Bloomberg News report that Governor Lael Brainard gave $750 in contributions to Hillary Clinton’s presidential campaign. A broadened report was created, revealing that 79% of total contributions from the Federal Reserve went to Democrats. Yellen stressed that just like other federal employees, Fed employees are mandated by the 1939 Hatch Act to restrict partisan political activity, but are allowed to make campaign donations. There should be no question that the donations are legal, but the appropriateness is determined by each individual themselves.

As hiking season, both physically and monetarily, approaches, the Federal Reserve forecast still provides insight on the upcoming economic condition, citing stronger domestic growth and shaky global markets.

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