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How Does the Fed Set the Interest Rate?

The Federal Reserve remains one of the most important influencers on the worldwide financial markets. By setting short term interest rates in the U.S., the Fed’s actions make an impact on interest rates across the world, as so much of the world economy is tied into what occurs in the U.S. and in U.S. markets.

The Federal Reserve itself looks at many different areas of the U.S. and world economy when deciding what actions to take on interest rates. However, the Fed’s mandate from Congress is focused on maximizing employment and keeping prices stable. So while the Fed actively discusses issues such as the trade war and the stock market, employment and inflation are always central to the Fed’s thinking. Accordingly, when trying to predict the Fed’s next actions, a review of the job market and inflation are essential. Where do these stand?

The latest inflation data shows a drop in inflation, a trend that has been in place since last summer. Recent job creation has also been falling. What does this imply? That the Fed could cut interest rates in the coming months if it wants to, as a pick-up in inflation or job creation caused by lower interest rates would be manageable for the economy and not likely to cause economic overheating.

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