The Fed tries to keep 'ahead of the game'

Eddie George, the former Governor of the Bank of England, described the role of Monetary Policy as 'keeping ahead of the game'. By this he meant central banks have to act early, in anticipation of movements in the economy.

The Federal Reserve Bank of the USA (the Fed) has raised its base interest rate from 0.75% to 1. The base (or benchmark) interest rate is important because all other interest rates in an economy are like rafts to the base rates tide. When the tide comes in all the rafts go up. All US commercial interest rates (like personal loans, savings rates and mortgage rates) will rise as a result.

The article points out that the US, like the UK and EU, has an inflation target of 2%. In all three inflation is around that level, but only the Fed is raising rates. This is where Eddie George's phrase becomes relevant. Monetary policy has 'long and variable lags' and takes up to two years to take full effect. The Fed is anticipating changes in the US economy and setting higher rates for what will happen in the future.

This is a very good topic for a Macro IA and you should follow the interest rate changes in major economies. (Note the 'analysis' section of the BBC story below makes this an unsuitable article for an IA, because it is doing the job you need to do in the IA, but there are lots of other reports.)

The BBC article is here

While this is about UK monetary policy the basics of monetary policy are the same in Australia, so useful for both VCE and IB students.

Eddie George was an almost fanatical player of Bridge. He attributed his initil success at the Bank of England to playing with various important people!