Fed Defends Gradual Interest Rate Policy

• Fed Defends Gradual Interest Rate Policy

The Federal Reserve on Friday defended its policy of raising interest rates despite Trump’s criticism of higher borrowing costs.

Jerome Powell, the Federal Reserve Chairman said gradual rate hike is healthy for the economy and signaled more hikes were coming.

The Fed has raised interest rates twice this year and expected to do so again in September and later in December. However, President Trumps has criticised the move, saying raising borrowing cost will slow down economic productivity.

Speaking at a research symposium in Jackson Hole, Wyoming, Powell said “my colleagues and I believe that this gradual process… remains appropriate.”

“The economy is strong. Inflation is near our 2 percent objective, and most people who want a job are finding one … If the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”

Powell further stated that gradual rate hikes are the best way to protect the economic recovery and sustain job growth while keeping inflation under control.

Antoinette Schoar, an economist at the MIT Sloan School of Management, who seems to support Fed’s position said the Federal Reserve should remain “above the fray.” “Fed policy should not have anything to do with politics,” said Schoar, who is also attending the Jackson Hole conference.

Perhaps, Laurence Boone, the chief economist of the OECD, sum up the division between the President and the Fed the best, according to him Trump is “fueling the economy with fiscal stimulus and then asking that you don’t tighten interest rates, but the Fed is normalizing monetary policy, not really tightening – it’s accompanying the recovery and lifting rates up to the point where they are neutral.”

“Financial conditions are strong and positive, and the Fed is tightening in line with those trends,” Boone added.