In a speech in 2017, Fed Chair Janet Yellen described the long-run federal funds rate that is consistent with achieving the Fed's mandate of high employment and price stability as the "neutral rate," which she estimates to be about 3 percent. Yellen noted that: "Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road long dash either too much inflation, financial instability, or both. In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession."
Source: Janet Yellen, "The Goals of Monetary Policy and How We Pursue Them," Speech at the Commonwealth Club, San Francisco, California, January 18, 2017.
Why is it potentially a problem for the Fed to "wait too long" to raise its target for the federal funds rate? Can't the Fed just wait until inflation increases and begin to slowly increase the target at that time?
A. Monetary policy works with a lag that can be up to 18 months.
B. Prices change slowly due to menu costs.
C. Legislation takes time to implement.
D. Consumers are irrational.
Why might interest rates that are too low lead to financial instability?
A. Interest rates that are too low could result in higher unemployment.
B. Rates that are too low could lead to speculative bubbles in stocks and other financial assets.
C. Low-interest rates could lead to deflation.
D. Rates that are too low could lead to a situation of hyperinflation.
Why might the Fed rapidly increasing its target for the federal funds rate push the economy into recession?
A. In this situation, increasing the target for the federal funds rate increases aggregate demand by increasing investment.
B.A rapidly increasing federal funds rate target would decrease employment by lowering wages.
C.The Fed rapidly increasing its federal funds' rate target increases unemployment by increasing net exports.
D.Increasing the target for the federal funds rate decreases GDP by reducing consumption.
In a speech in 2017, Fed Chair Janet Yellen described the long-run federal funds rate that is consistent with achieving the Fed's mandate of high employment and price stability as the "neutral rate," which she estimates to be about 3 percent. Yellen noted that: "Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road long dash either too much inflation, financial instability, or both. In that scenario, we could be forced to raise interest rates rapidly, which in turn could push the economy into a new recession."
Source: Janet Yellen, "The Goals of Monetary Policy and How We Pursue Them," Speech at the Commonwealth Club, San Francisco, California, January 18, 2017.
Why is it potentially a problem for the Fed to "wait too long" to raise its target for the federal funds rate? Can't the Fed just wait until inflation increases and begin to slowly increase the target at that time?
A. Monetary policy works with a lag that can be up to 18 months.
B. Prices change slowly due to menu costs.
C. Legislation takes time to implement.
D. Consumers are irrational.
Why might interest rates that are too low lead to financial instability?
A. Interest rates that are too low could result in higher unemployment.
B. Rates that are too low could lead to speculative bubbles in stocks and other financial assets.
C. Low-interest rates could lead to deflation.
D. Rates that are too low could lead to a situation of hyperinflation.
Why might the Fed rapidly increasing its target for the federal funds rate push the economy into recession?
A. In this situation, increasing the target for the federal funds rate increases aggregate demand by increasing investment.
B.A rapidly increasing federal funds rate target would decrease employment by lowering wages.
C.The Fed rapidly increasing its federal funds' rate target increases unemployment by increasing net exports.
D.Increasing the target for the federal funds rate decreases GDP by reducing consumption.
