Most people by now know that the Federal Reserve chose to keep interest rates unchanged last week during the September meeting, and this was a decision that was based on a number of issues and situations going on worldwide. There have been a lot of critics ever since that decision was made to keep rates at historically low levels, some of these critics are even inside the Federal Reserve, but now Federal Reserve Chair, Janet Yellen, is publicly defending the decision.
Yellen is arguing that the Federal Reserve made the right decision to keep rates unchanged for the time being, saying that low inflation is one of the many reasons why keeping the interest rates at or near-zero is the best call for now. Yellen did say that although interest rates have not been raised, there was still plenty of time for that to happen this year, and reiterated that the interest rate hike is going to more than likely happen before the end of 2015. Yellen spoke at the University of Massachusetts on Thursday, where she talked about how inflation has been running really low for quite a few years now, and that this is one concern that helped reinforce the decision to keep the interest rates at historically low rates, saying that the current monetary policy was appropriate given the situation. The inflation levels have been low for many years, falling below the Federal Reserve target of 2 percent, but Yellen said that she believes the inflation will begin rising upwards towards that 2 percent goal very soon. While you would think that inflation would end up at some point rising to a more normal level, meaning around the 2 percent target, this has been something that has not happened for many reasons, and one of the main reasons is that you have a lot of temporary factors coming into play. The biggest factor that has been keeping inflation from reaching that 2 percent goal as of lately has been the low oil prices, and oil prices have been holding steady at low levels for the past year. Yellen said that the decrease in energy prices is to blame at least partially for the 2013 and 2014 target shortfalls in the inflation level, and it is also to blame for about half of the shortfall for this year as well.
In Yellen’s University of Massachusetts speech, she spent a lot of time talking about the economy in the United States, which is different than the speech she gave last week which was more focused on the global economy, with an emphasis on China, and then how that relates to the volatility in the stock market. Even though Yellen still did mention China briefly during this speech, as well as other global issues, she spent a lot of her time talking about the economy here at home in the United States and how that has affected many different issues for the Federal Reserve, such as choosing to keep the interest rates unchanged at a time when more critics have been speaking out against this decision. Yellen also mentioned that she thinks the Federal Reserve is going to be looking at raising the interest rates later in the year, but with only two meetings left, it does not leave much time for that decision to be made. The only two meetings left in 2015 for the Federal Reserve are in October and December, and at this point it is not clear which meeting would be the most likely meeting for the Federal Reserve to agree on raising the interest rates.
Ever since the Federal Reserve handed down the decision last week to keep the interest rates the same, the stock market has been going through a pretty steep selloff, with all gains for the year being demolished on the Nasdaq. The Dow has also seen some bad times with it now being below the 10 percent correction level, and investors are left feeling puzzled and confused over the Federal Reserve decision, as uncertainty about the future remains. Part of the issue is whether or not the global economic issues are going to further hinder the American economy, such as the economic slowdown in China, which for the most part has not made a huge difference for the country. Of course, Yellen is not someone who gives away her hand too early, and she often spins both sides of an issue as to weigh the good and the bad of both to ensure equal opportunities. This means that Yellen did talk about if the economic outlook worsened over the next month or so, and she talked about what that would or could mean for the interest rates. Yellen said that it is always possible an interest rate hike could be pushed back to 2016, but this would be only if the economic outlook got bleaker as the months wore on, which means if some bad reports and data come in within the next month or so, then that could delay the interest rate decision until December, and then into the next year depending on how the information looks leading up to the December meeting. Yellen has always been pretty even-handed when talking about the economy and raising the interest rates, making sure she keeps everyone aware that this decision is very serious, and it’s a decision that is not made easily, and numerous factors go into the decision just days prior to the meetings. The Federal Reserve all year has said that raising the interest rates would be a very slow process, one that would be proceeded with caution, because while it seems the economy is alright, moving too quickly could spell disaster at this point in time. For now, it appears Yellen will have to stand her ground and decision, as she is confident she made the best decision for the country at this moment, and future plans can change at any time.