Before the presidential election, Federal Reserve officials held a meeting discussing whether or not they should raise rates. Currently rates have been relatively low at 2% in order to stimulate the economy by encouraging both domestic and international investment. However, the Fed thinks that the economy is ready for higher rates. As a result the Fed has concerns for an extended low interest period due to a misallocation of capital and mispricing of risk. Janet Yellen believes raising rates is the best course of action for the future of the economy. Two other federal officials believe that raising the federal funds rate is the right alternative as well. How do consumers feel about an increased rate?
Due to the shift in monetary policy, it is likely that consumption will decrease and saving can increase. Also investment will be affected but, the big question is how will this affect our GDP? Earlier in the year inflation increased but it did not go above 2%. We can see a correlation with a decrease in energy prices and non-energy imports as well. The Fed has kept there benchmark rate between .25% and .5% but, this action may encourage higher risk taking and borrowing. The next meeting is scheduled sometime in December and right now the chance of the increased rates seems to be the direction which our country is going in.
http://www.nytimes.com/2016/11/23/business/economy/federal-reserve-interest-rates-meeting-minutes-yellen.html?ref=business
For the Fed, the tax cuts and fiscal spending Mr. Trump has proposed could send inflation higher, potentially prompting a more aggressive path of interest-rate increases. Ms. Yellen said during testimony to Congress last week that “there’s a great deal of uncertainty” surrounding the Trump administration’s plans.
ReplyDeleteIt would be interesting to see whether a rise in the interest rates would positively or negatively affect the economy in the long run.
ReplyDeleteInvestment would most definitely decrease, and the opportunity cost of spending money as an asset increases. It would be interesting to see the impact of rising interest rates on the inflation rate, unemployment rate and the value of GDP in the long run.
It sounds like the Fed has some serious discussing to do at this December meeting about how raising these interest rates will affect the economy. Who knows we might not see an increase at all, because they are just too uncertain of the Trump administrations plans.
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