Dynamic concept Monetary policy

Fed policy and large scale economic control system

Yesterday the FOMC meeting decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent, and interestingly, it predicted two policy rate hikes this year, rather than four as envisioned in December last year when the first rate hike was made. In fact, in my note on December 26, 2015, I had predicted that “… the Fed is only able to raise the rates to 1% in 2016.”

The second interesting point in the FOMC statement is that the Fed holding the policy rate unchanged because “… global economic and financial developments continue to pose risks.” The FOMC recognized that the employment rate has almost reached its goal, and the medium term inflation expectation is close to its target of 2%. “In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will … take into account a wide range of information, including … readings on financial and international developments.”

The global economic control system is a large scale system consisting many subsystems of economies at national or regional level. While each nation or region has their own central banks conducting monetary policies, there is really not a central bank at global level coordinating monetary polices globally. A proper control strategy for a large scale system must have a central controller and local controllers, the central controller responsible for overall control and supervision, and local controllers responsible for tilt controls. In lacking such central controller, it is not surprise to see the Fed stepping up for that role. However, due to limiting interests to the U. S., the Fed would not be fully qualified for the central role.

Holding interest rate unchanged in the U. S. appears to ease the concern of capital outflows from the emerging markets and weakening of these currencies, however it could force some of the central banks, such as the ECB and the Bank of Japan, to reduce interest rates deeper into negative. For the U. S. itself, low rates leave the Fed fewer maneuverability upon any economic downturns down the road.


[1] Kevin economy note on December 26, 2015.

[2] FOMC statement March 16, 2016.

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