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    Why Analysts Are Saying the Fed Has Already Caused the next Recession

    It's been 7 years since the benchmark interest rate for the US (which is in turn the country who's currency is the global reserve currency and therefore affects all global interest rates) has been at near 0 percent. The US Federal Reserve is expected to start raising interest rates in December and if not then, in early 2016.

    The problem is that some economists believe that this is too soon, and raising interest rates too early will hamper economic growth. The more worrying theory is that the mistake has already been made by not raising rates sooner. In this case, a recession in the near future is already likely because interest rates have not been raised by the Fed sooner.

    The reason for this worry is that the Fed may be delaying for too long by waiting for the US unemployment rate to fall below 5%. As Fed officials themselves agree, the level at which low unemployment starts to increase inflation is at around 4.9%, a level which we're probably at already.

    US Jobless Rate Chart
    US Jobless Rate Historical Chart

    The job of the Federal Reserve is to essentially anticipate the future health of the economy (which is not as easy as it sounds) and to begin raising interest rates at precisely the correct moment when inflation begins to rise. A leading indicator for rising inflation is falling unemployment.

    So the lower the rate of unemployment is, the likelier the chance that the economy will fall back into recession, even with higher rates. The Fed should've hiked last year when the economy was growing at a faster rate, and emerging markets and commodities were not in crises.

    The information provided is for educational purposes only and should not be considered as investment advice.

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