The Feds revised their interest rate forecasts

The Feds revised their interest rate forecasts late last month hoping to normalize them faster than many market watchers would have anticipated. The new forecasts are higher, the projections having being raised for 2015-2016. This is a good move for extremely low rates can negatively affect the job hunt and the economic growth of U.S.

With low interest rates, old workers delay their retirement holding onto their job as the investment income from fixed income products is too meager to sustain them, this, in turn, crowds out the youth from employment opportunities.

Even companies are reducing their investment in the economy for they can not comprehend the true level of economic growth in the country i.e, growth in the absence of an extraordinary macroeconomic policy. People are also taking up heavy debts to buy back their stocks or to pay dividends due to the low cost of financing. While this improves the price-earnings ratio, it can stunt growth oriented capital projects.

With the labor supply demand mismatch, there is an increasing wage inflation: those employed are earning more, while those unemployed aren’t getting jobs. In the medium term this can lead to higher levels of inflation as can also be seen by the CPI indications.

Finally, unconventional monetary policy of recent years has encouraged significant bouts of capital misallocation, resulting in crowded trades, correlated risks and the overly stretched valuations seen in markets today.

These in turn, are increasing systemic risk, raising the potential for a violent capital unwinding.

Thus, fiscal initiatives, at this point, would perhaps be more beneficial to the economy than the current policy of zero-interest rate.

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