Radio Sputnik has discussed the Fed's plans with Thomas Prusa, Professor of Economics at Rutgers University in New Brunswick, US.
Sputnik: The Fed is expected to raise interest rates amid financial market turbulence. What impact will the hike have on markets once enforced?
Professor Thomas Prusa: Right, so the expectation is that the Fed is going to raise interest rates by 25 basis points. This is the market's expectation. So anything but an interest rate increase would be a surprise. The market has already incorporated the expectation of higher interest rates into stock prices to the extent that stock market volatility and weaknesses occurring though it is difficult to attribute a lot of it to interest rates.
There are a lot of things happening in the economy and the Fed is only one of the factors.
Sputnik: Do you think that the Fed should actually raise the interest rates? I mean, just from an economic point of view, would it be correct for them to do so?
Professor Thomas Prusa: My own sense is "yes". The Fed has been signalling that they expect to raise interest rates over a series of steps. This is one of the steps that they are going to take. The Fed has been quite accurate despite consistent criticism by people.
Sputnik: Okay. And so what has actually triggered the necessity to actually take this step to increase interest rates? I mean what factors is it in the US economy that are signalling for this?
Professor Thomas Prusa: Right. So first we have to put into context interest rates by any historical standard are quite low-levels. It is raising interest rates from what was widely criticised as you know "distorted levels" just a couple of years ago. So right now the interest rate the Fed is controlling is at 2.25 %. So we are not at extraordinarily high-interest rates.
We are raising interest rates from what are by any in historical standards very low levels. The Fed is trying to unwind some of the policy intervention it did to help the US economy recover from the great financial crisis of 10 years ago. And so it is really trying to return to more of a normal level of monetary policy. The US economy is quite strong, has continued to be quite strong under President Trump. And I think the Fed sees a lot of evidence of rising prices in the economy.
Sputnik: Well, Trump tweeted "it is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike". What would you say to Donald Trump?
Professor Thomas Prusa: That he is throwing "everything but the kitchen sink" into his tweet. He has a lot of factors there of events that are happening in the world that have virtually no bearing on the decision of the Federal Reserve.
It is a bit ironic that a man who spent so much time speaking of "America First" is trying to pressure an independent federal agency to make a decision based on the economic conditions of other countries. So it is a bit ironic that he, you know, thinks that the Fed can influence France and China's economic conditions.
Professor Thomas Prusa: You know, anyone who attributes that they understand the reasons why stock markets move in the way they do is a fool. And so I think what is more realistic what is going to happen is that the Fed may decrease the already signalled interest rate increases that they have kind of given us a signal for 2019.
I think what's a more realistic view is that we may not see three increases next year, we might only see one or two increases over the next twelve months. But you know any attributing that the Fed needs to focus on the stock market in ordinally in outweighing either inflationary expectations or its views of the overall growth rate in the United States, profoundly misunderstands what the Fed role is in the economy.
Sputnik: You have to admit that Trump's criticism of the Fed is really different from previous US leaders' approach. And actually many people are slamming him, of course, for just even assaulting the Fed's independence. But some actually criticise the Fed and say that "we don't even need the Fed". What are your thoughts about the Fed as an institution?
Professor Thomas Prusa: Right. So the Fed, in my own view, but I actually think I am echoing the view of the broad consensus of economists, the Fed is the shining light of US macroeconomic policy. They are you know to turn a phrase "the gold standard" so to speak of policymaking in the United States and arguably in the world. The Fed has long been criticised either as being you know "too loose with money, too tight with money".
So you know, criticism of the Fed more broadly is nothing new. Now the fact that the president is aggressively trying to pressure the Fed is new and it is consistent with kind of a general pattern of behaviour by President Trump, which is you know criticising a variety of institutions that he for some factual reason he believes is his unhappy with. But the Fed, again it is very difficult to criticise the Fed, their performance and management of the US economy have been quite extraordinary.
Views and opinions, expressed in the article are those of Thomas Prusa and do not necessarily reflect those of Sputnik