America's Fed Funds rate is below 1% and its growth rate is 3.9%. India's lending rate is approximately 9.5% and its growth rate is 5.1%.

India just dropped its lending rate while the US is considering increasing its own rates. Isn't this counterintuitive? Wouldn't the increase in the 'cost of capital' slow down the US economy?

  • 1
    $\begingroup$ This can be relative to the country and probably shouldn't be compared from country to country. As an example, if the US targets a growth rate of say 3.5% and the it has jumped to 3.9% whilst interest rates are at record lows, then the Federal Reserve would look to start increasing interest rates there before things start heating up too much. India, as an example, might target growth of 7% and if growth falls to 5.1%, then India my look to reduce their interest rates to help stimulate the economy. You need to look at the direction of the growth and what the target growth for that country is. $\endgroup$
    – Victor
    Sep 30 '15 at 21:23
  • $\begingroup$ The usual target growth rate for the United States is 2-3%, so they may be increasing interest rates because they DO want to slow down growth. $\endgroup$
    – DornerA
    Oct 1 '15 at 21:11
  • $\begingroup$ I may be misunderstanding the question, but didn't the most recent FOMC meeting end with (a) no rate change and (b) indications that the projected path of rate increases has actually been pushed further out into the future? (That is, some of the "dots" in the projected path of the FFR have been shifted further out into the future.) $\endgroup$
    – CompEcon
    Oct 2 '15 at 3:26
  • $\begingroup$ The US Federal Reserve is not increasing interest rates at this time. (Sept 17, 2015) business.financialpost.com/investing/global-investor/… So your question should be elaborated to, "Why is their stated goal to increase interest rates?" $\endgroup$
    – Anon
    Oct 2 '15 at 10:13

The Fed recently decided not to raise rates because the economy is still recovering. In theory, as unemployment goes down, it should start to increase inflation. However, unemployment is low and inflation is also low. This is probably because people have left the labor force and are no longer counted. Having low interest rates does stimulate the economy but the Fed wants to raise rates, when possible, for several reasons. Policy is supposed to be countercyclical so keeping low interest rates indefinitely could lead to inflation. Also, low interest rates encourage investors to pursue more risky investments for higher yields which can cause bubbles and crashes. Also, staying at low interest rates limits the Fed's ability to use monetary policy at the zero-lower-bound where they cannot stimulate the economy anymore by using conventional monetary policy.


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