Directions: Read the following passage and answer the questions that follows.
Economists and investors are not only worried about when the Federal Reserve will start to push up interest rates. Just as important is the scale and length of the tightening cycle—how much the Fed will need to tighten policy, and how long it will take to do so. There have been 12 American tightening cycles since 1955, and they have lasted just under two years on average. In five of the past seven instances, however, the Fed has relented in a year or less, largely because inflation has been relatively subdued in recent decades. The inflationary periods of the 1970s and early 1980s saw the biggest increases in interest rates; that helped push the mean increase over the 12 cycles to five percentage points. But the median change may be a better guide to the coming cycle; it stands at just over three percentage points.
Central banks tend to push up rates when the economy is growing rapidly and inflationary pressures are emerging. If they overdo it, the economy may tip into recession. On average, a recession has followed about three years after the Fed’s first hike. Yet that is partly because recessions are a regular occurrence. And tightening does not lead inevitably to a downturn: in 1983 and again in 1994 there was a gap of seven years between when the Fed started raising and the onset of the next recession. Nor are higher rates necessarily bad news for equities. In nine of the 12 most recent cycles, the stock market has risen in the year following the first rate increase. Since the Fed tends to tighten when the economy is booming, profits are usually rising. In contrast, Treasury-bond yields rose in the first year of the cycle on all but one occasion. A pertinent example might be the cycle that began in 1994. The Fed had kept rates low for a long time in order to help the financial sector, which was still recovering from the savings-and-loan crisis of the late 1980s. When it finally did begin to raise rates, the pace of tightening seemed to catch many investors by surprise, particularly those investing in mortgage-backed bonds. Askin Capital, a hedge-fund manager, went bust as a result.
Those who worry that the Fed might be moving too quickly point to policy mistakes elsewhere. As the Fed’s chairman herself, Janet Yellen, remarked in March, “The experience of Japan over the past 20 years, and Sweden more recently, demonstrates that a tightening of policy when the equilibrium real rate remains low can result in appreciable economic costs, delaying the attainment of a central bank’s price-stability objective.”
Japan was the first country to reduce rates to zero (hitting the “zero lower bound” in the jargon) and the first to struggle with deflationary pressures and an ageing population. In August 2000 the Bank of Japan raised rates from zero even though prices were still falling; a recession started two months later. A second attempt at raising rates, in 2006, also had to be reversed two years later. Similar problems have bedevilled central banks that have attempted to raise rates in the wake of the financial crisis of 2007-08. The European Central Bank pushed up interest rates in 2008 and again, twice, in 2011, as the euro-zone debt crisis was unfolding. Sweden’s Riksbank went even further, pushing rates from 0.25% to 2% in 2010-11 in response to a surge in inflation; by late 2011 the bank had to change course and Sweden now has negative interest rates.
The sluggish nature of the recovery in the rich world since the crisis, and the high levels of debt that remain, explain why it has been so difficult for central banks to return to a “normal” level of interest rates. In the past, many central banks were usually raising rates at the same time. But any country that tightens policy at the moment will stand out from the crowd. Foreign capital may drive its currency higher, as investors take advantage of more attractive yields. That will act as a further tightening of policy, since a higher exchange rate reduces the price of imports, and so adds to deflationary pressures. That suggests this cycle, whenever it begins, will be shorter and less steep than in the past.
- What, according to the passage, are the impacts of rising rates on the stock market?
Stock market shows no sentiments towards rate policystock market shows a positive impact of rate policystock market shows a negative impact of rate policystock market rises with the tightening policiesNone of theseOption D
- What, according to the passage, is the about Fed’s Chairman?
a. Japan is a victim of tightening policy for past 20 years.
b. tightening policy may result into central bank’s price stability objective.
c. She always gives remarks in MarchBoth a & bBoth b & cBoth c & aOnly bNone of theseOption D
- What was the average span of endurance of America’s tightening rate policy?
a. 12 Years
b. 2 Years
c. 7 YearsBoth a & bBoth b & cBoth c & aOnly bNone of theseOption D
- What, according to the passage, is the most appropriate synonym of “bedevilled”:
- Why, according to the passage, inflation was subdued in America during American tightening cycles?
There have been 12 American tightening cycles since 1955, and they have lasted just under two years on average.Central banks tend to push up rates when the economy is growing rapidly and inflationary pressures are emerging.A recession has followed about three years after the Fed’s first hike.The Fed had kept rates low for a long time in order to help the financial sector, which was still recovering from the savings-and-loan crisis of the late 1980s.Not mentionedOption E
- What, according to the passage, is the most appropriate antonym of “drive”:
- Why is it so difficult for central banks to return to a “normal” level of interest rates?
a. the sluggish nature of the recovery
b. the raising rates
c. the high levels of debtBoth a & bBoth b & cBoth c & aOnly bAll are CorrectOption C
- What is the theme of the passage?
Why Monetary Tightening Is Not A Headwind To The Stock MarketPolicy tightening outlook knocks stocksStock-market investors brace for week packed with FedWill higher US interest rates and the stronger dollar destroy the stock marketNone of theseOption B
- What is the tone of the passage?
- What should be the title of the passage?
Monetary Policy ReformationInflation and TighteningPitfalls of Monetary PolicyTightening painsNone of theseOption D