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Introduction:

Brief history of what after the 2008 financial crisis.


Dec 2015 Janet Yellen looking at 2 indicators to decide: Unemployment Rate(Actual
9%->5% / Ideal 5%) and Inflation Rate(Actual 1.6%/ Ideal 2.0%).
0.25% hike. 1.6% is too low..
As a result:
Deflation http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
GDP Decline in 20161q then increase in 20162q
http://www.bea.gov/newsreleases/national/gdp/gdp_glance.htm
Unemployment Rate Improvement in Unemployment rate

Should Fed raise interest rates?


No
Fed ought to wait because:
1. Labour market is not doing as well as it should be doing. Employment-topopulation and labour participation rate remain seriously lower than pre-crisis
levels. People are entering the workforce as fast as jobs being created such
that unemployment rate remains relatively stable. Wages isnt rising fast
enough, a 4% rise isnt enough to compensate for the first seven years of
recovery.
2. Put American expansion at risk. Interest rate hikes has ripples across the
financial system. American rate rise lead to capital inflows, leading to a rise
in currency, which is bad for exports.
3. Inflation rate is too low, risk of going into depression. The Feds cant (keep
undershooting inflation targets. (Q: Why is deflation bad? A: Why would you
buy something if it gets cheaper tomorrow)
Market expects yields to fall
Bond yields are falling.
Evidence: The yield on the 10-year US Treasury is 30 basis points below where it
was on June 23rd. The real yield is close to zero.
These indicate falling expectation for growth, for inflation, and a rising risk
premium.
Short term interest rate is determined by the FOMC. Federal Reserve Open Market
Committee.
Long term interest rate is determined by market forces based on short term interest
rates. If the market believes that interest rates are set too low, resulting in future

inflation, long term interest rates will be higher to negate the decrease in
purchasing power brought about by inflation. If the market believes that interest
rates are set too high, future inflation will decrease, they will lower interest rates so
that cost of borrowing is low enough.
Central banks cannot respond to even a modest monetary shock. Because, Interest
rates cannot go down lower.
Solution to the US economy

Best solution is to weaken a countrys currency through asset purchase. How?(Open


market purchase)
Not everyone can depreciate at the same time. The depreciation of the pound is bad
for the US economy, as the stronger US dollar reduces their export competitiveness.
QE could help if it boosted expectations of growth and inflation. But the near-zero
nominal interest rate makes it impossible to happen.