Yellen announces 25 basis point rate increase. Will this dampen Trump’s infrastructure stimulus ?

The chair of the Federal Reserve Janet Yellen has announced a small but policy significant increase in their targeted range for interest rates from 0.25% to 0.50 % to 0.5% to 0.75%.
The over night funds rate sits at 0.41% and the Federal reserve open market committee also approved a quarter point rise in the discount rate raising the primary credit rate from 1% to 1.25% points. It also indicated that future rate rises would be “data determined” and gradual over the coming year. The stock market has initially reacted negatively although that may well turn out to be a 24-hour wonder.But there is a more serious issue. Is the US recovery strong enough and the risk of price inflation real enough to justify even this small increase in rates? Some analysts and bankers are convinced.I’m not so sure. That will be the key issue in the months going forward. Keeping the interest rates low enough to accommodate the infrastructure and deficit spending that is part of the Trump strategy going forward should be a top priority. The economy is still quite vulnerable to a set back and discouraged worker unemployment still significant. Low interest rates are a necessary but not sufficient condition of robust economic growth. We are going to see if the Fed has learned the importance of this key insight in the near future. From a Canadian point of view this rate rise may well put pressure on the Bank of Canada to raise rates as well, They should resist the temptation to do so.

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About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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