The US Federal Reserve Continues to Raise Interest Rates
The United States Federal Reserve recently evinced contractionary monetary policy, by increasing the target interest rate by 25 basis points. The revised range for the target interest rate is now 2 percent-2.25 percent. There are two sides to the argument on whether the Fed should persist with such a contractionary move, which is likely to be repeated prior to the conclusion of this year. While the Chair of the Fed supports this move, others are worried about the potential decline in investment.
Federal Reserve Chair Mr. Jerome Powell supported this contractionary move by citing the strength of the US economy. He believes that gone are days when the Fed needed to decrease interest rates in order to boost investment and restore economic growth. He believes that the US economy is in a “ particularly bright moment” and hence is strong enough to withstand an increase in the interest rate. As a matter of fact, ever since the 2008 financial crisis when the housing bubble burst, the Fed has been steadily increasing the interest rates.
Given that the US Gross Domestic Product increased at a substantial pace, Fed officials expect the US economy to experience a significant growth of 3.1percent this year. As a result, the Fed is expected to increase rates in 2019 three times followed by another rate increase in 2020. ( BBC)
However, it is important to note that higher interest rates make borrowing an expensive endeavor, effectively declining the rate of investment. Investment in a key component to determining economic growth and many experts fear that reduced investment, a direct result of increased interest rates, could serve as a gateway to a recession. US President Donald Trump made sure his opinions regarding monetary policy were prominently heard. “ I’m worried about the fact that they seem to like raising rates”, he stated. He further added, “ We could do other things with the money.” ( Source BBC)
President Trump is an avid supporter of individuals being able to borrow cheaply. Mr. Powell, however, has stood his ground and clearly indicated that the US economy is strong enough to absorb the interest rate increases. He also outlined that the Fed will refuse to take in political views when making decisions pertaining to monetary policy.