Fed Watch QE End and First Rate Hike - Essay Example

Fed Watch QE End and First Rate Hike: Quantitative Easing as the monetary policy comes to effect when the Fed seeks to improve the economic conditions of the country. In these, the central bank provides different approaches to the monetary policy with the aim of aiding in controlling or stimulating economic growth as a counter to a failing monetary policy. During the system, the central bank buys assets of specified amount and effect from the other commercial banks and private institutions with a price-raising effect on those assets hence creating a lowering on the actual yield that they present.

The central bank in effect increases the monetary base. The need for changes in monetary policy arises from a failing policy or one that is not effective in creating the economic impact required. According to the information gathered and the specific economic signs available, chances are high that several hikes will materialize in the year 2015. Considering various studies conducted on the same, 38 respondents that included analysts, money managers, and economists, there looms a possibility of a hike in the rate in 2015.

According to the information gathered, the hike will result in steeper interest rate increases in the coming years. The survey indicates that the rates will hike to a high of 3.04% by the end of 2017 (Liesman). When this takes effect, the Feds take a longer time normalizing the rates based on the need for constant review the rates in consideration of the effect they create. The application of an expansionary monetary policy reaches a point of failure when the interest rates on the short-term run towards zero.

These explain situations that quantitative easing becomes applicable. Quantitative easing applied during these periods of low-interest rates aids in improving the inflation rate and reducing its effect. Quantitative easing aids in stabilizing inflation and controlling the rate to maintain it within the targeted points of the economy. These are accompanied by the improvement of the economic policies to make the economic policy more effective in helping the central bank take action against deflation.

The increased money supply in an economy with less interest affects the money supply. The banks will run low on money to lend and have their reserves risk lowering further due to a high money supply in the market and uncontrolled demand. To reduce these effects, the central bank hikes the rates and mops out the excess liquidity from the market to aid in improving the economic situation. In addition, a high-interest rate reflects a decreased price of bonds while a low-interest rate reflects the opposite.

High prices for bonds make them expensive and reduce their success rate hence affecting economic development projects that the government bonds aim to fulfill affecting the economy further (Fabozzi, p.19). Looking at the current state, the need to hike the interest rates proves vital aimed at tightening the monetary policies more as applied in 2007 to 2008 financial crisis. The application of quantitative easing during the crisis aided in controlling the worsening of the crisis and since there remain need to reduce the liquidity on the market, chances are high that a first rate hike might be looming.

This analysis follows the need to reduce the financial effects that the world is facing currently through which low-interest rates have proven ineffective in controlling the demand for money and hence excess liquidity on the markets needing mopping up. Work cited:Fabozzi, Frank. Fixed Income Analysis. John Wiley & Sons. Liesman, Steve. First Rate Hike now Likely in August: CNBC Fed Survey. CNBC March 2015. Viewed on May 04, 2015 from http://www.cnbc.com/id/102509425