What’s Next for the Fed After the Anticipated Rate Increase?

Ylan Q. Mui in The Washington Post: “The Federal Reserve is widely expected to raise its benchmark interest rate this week for the first time in nearly a decade … Raising rates, however, is only the first step in getting the economy — and Fed policy — back to normal.”

“After deciding to increase rates, the first challenge facing the Fed is exactly how to do it.”

Setting a target for the federal funds rate “will prove too unwieldy now that the Fed has amassed a balance sheet of more than $4 trillion. Instead, the central bank hopes to manage the fed funds rate by changing two other rates: the interest it pays to banks for reserves held at the Fed and the amount it pays other financial institutions, such as money market funds, for short-term trades known as reverse repurchase agreements. The former is expected to act as a ceiling on the fed funds rate; the latter a floor.”

“Even with a gradual pace of increases, the Fed’s benchmark rate may not return to its historical long-run average of 4 percent. The Fed’s fall projections fell just shy of that goal at a median of 3.5 percent. Some economists believe that the stopping point could be even lower, due to the double whammy of a slowdown in productivity and a shrinking workforce that have lowered the speed limit for the American economy.”

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