There has been a big change in monetary policy in the United States. Further cutback in quantitative easing, QE, has been arranged in FOMC in September. According to Janet Yellen, an American economist who takes the chair at the Board of Governors of the Federal Reverse System, if there is any move in restoration of labor market and increase in price, there is an enough possibility that QE could be terminated in the next FOMC which will be held in October. The money market is estimating that after the termination of QE, there will be a rise in the federal fund rate. There is an outlook for the future federal fund rate made by the members of FOMC has been released in the public. Despite the estimations of each member vary, the lowest estimation is indicating there will be a 2 % rise in the federal fund rate. If the rate of interest goes up, the interest that each enterprise has to pay increases, resulting in a fall in an income. Therefore, stocks will likely to decrease. Furthermore, it will make the process of investors taking loans which is used for investments more difficult, thus equity investment will be much harder to carry out and an enterprise has to face the difficulty in the growth of its stock price. It is true that newly-established enterprises are free from the pension and other legacy costs and their introduction of the new technology eases the innovative projects, compare to other established companies. However, such young enterprises have a major disadvantage in terms of the financial resources. Zero interest rate policy makes it relatively easy for such new business groups to collect funds from investors. Hereafter, the monetary policy of FRB will shift from the relaxation phase to the retrenchment phase. As quantitative easing being terminated and the interest rate increases, it will be quite difficult for new enterprises to gather capital. In my previous blog, I talked about Elon Musk’s brand new, innovative business and how they could be successful in the future. However, this change in monetary policy will significantly burden his businesses. What Elon Musk should do is that he should quickly realize both the spaceship development and mass production of the electric cars before the formalization of the rise in the interest rate and become a superior enterprise, which has a firm financial foundation and does not get much affected by the change in the interest rate.

Bibliography

HILSENRATH, JON. “Fed Chief Yellen Seeks Interest-Rate Consensus.” The Wall Street Journal. Dow Jones & Company, 14 Sept. 2014. Web. 25 Sept. 2014.

HILSENRATH, JON. “Fed Plots Cautious Course on Rate Hikes.” The Wall Street Journal. Dow Jones & Company, 17 Sept. 2014. Web. 25 Sept. 2014.