Essay Example: Interest Rates and Inflation in the United States

Published: 2022-02-22 11:43:44
Essay Example: Interest Rates and Inflation in the United States
Type of paper:  Essay
Categories: Policy United States Inflation
Pages: 5
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The War between President, Donald Trump Trade Policy and the Federal Reserve Bank Interest Rate Policy

Recently, the United States Federal Reserve officials held a meeting to establish a policy that saw the rise of the interest rates. It came after President, Donald Trump had issued demands that the Federal Reserve should not raise the interest rates as they intended. Although the officials did not mention anything about the President demand, it was clear that they were still placing his economic policies into consideration ("Fed Plans To Continue Raising Rates, Despite Trump's Ire"). Initially, President Trump had established policies to cut tax with the aim of steering the economic growth in the country. For this reason, Trump sought that it was not necessary to impose an increase in the interest rates since it could lead to an economy burnout for the first time after the global economic crisis that affected the country in 2008.

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Nevertheless, in the meeting held by the Federal Reserve officials, it was predicted that the interest rates would increase to the point of approximately above 3% by the end of 2019 ("Fed Plans To Continue Raising Rates, Despite Trump's Ire"). Despite the contradicting opinion from the President, the Federal Reserve officials find it necessary to raise the interest rates and evaluate how the economy intends to perform with the high rates of interest. While the officials are considering the president's economic policies, they are concerned that these policies may hinder the economic growth of the county. For instance, President Trump introduced trade policies that saw the imposition of tariffs on items such as steel, aluminum, and other Chines goods and services. Although these policies may not have shown any hurt to the aggregate economic growth, the Federal Reserve points out that there are uncertainties considering this trade policy. They argue that the tariffs of steel and aluminum prohibit and decrease the new investment especially in the energy sector indicating that the country is forgoing investment opportunities regarding production. This can affect the economy adversely in the long-run.

It is worth noting that due the Trump's policy that saw a lower tax rate, it lends to the increase in the government spending. It was necessitated by the fact that as the tax rate decreases; more business tends to invest more. In this case, the Federal Reserve is worried more about the possible economic disruptions as a result of these trade policies. In their argument, it is evident that frequent economic disruptions may hinder the economic growth in the United States as compared to the entire globe ("Fed Plans to Continue Raising Rates, Despite Trump's Ire"). For this reason, slower economic growth means that inflation will increase and the US economy may face a shortage of skilled workers. In this case, therefore, the Federal Reserve affirms that increasing the interest rates is a significant technique in handling the possible risks anticipated in connection to the trade policies enacted by the President.

Analysis of the Problem

The recent move by the US Federal Reserve to develop a policy that is leading to an increase in the interest rates will impact various players within the economy. For instance, an increase in the interest rates means that it will affect the investors adversely since it means there is an increased cost of borrowing. On the other hand, it has a positive impact on the long-term direction of the economy. In particular, it means that the global bond market is set to have greater confidence since the nine years economic expansion is set to keep going in the coming years upon the increase in interest rates. Consequently, the economy there is no anticipation of any rise of inflation in any case whatsoever. Moreover, as of October 2018, there was an increase in the 10 years United States Treasury bonds to 3.25% from 2.82% in August 2018. In 2016, the rate of the treasury bonds was below 1.4%. Additionally, it is also evident that not only the bonds, the various types of securities have also shown a relative increase in prices ("Interest Rates Are Rising for All the Right Reasons").

By looking closely, the bottom line of the rise in the interest rates by the Federal Reserve is to regulate the inflation rates in the country since inflation and the interesting work closely. While inflation is considered as the cost of saving money, the rate of interest is considered as the cot lending out this money. In this case, the Federal Reserve Bank, and the central bank of the United States is responsible for setting the interest rates with the aim of maintaining a balance of the inflation in the economy. As mentioned earlier, higher interest rates mean that the cost of borrowing and servicing loans is also high. Therefore, the Federal Reserve changes the interest rates to balance the economic factors including the levels of employment, the level of prices, and further ensuring that the economy stands at a favorable point ("Interest Rates Are Rising for All the Right Reasons").

Furthermore, by following the president commands to reduce the interest rates, it means that the consumers will spend more stimulating the economic growth which may speed the level of inflation. A high level of inflation is harmful to the economy, and this is the primary reason, the Federal Reserve is pursuing the move to increase the interest rate despite the demand by the president. It is worth noting that as the interest rates increase, it reduces consumer consumption since the cost of borrowing increases where they tend to invest less. As a result, it slows the rate of the economic growth which in turn reduces and regulating any increasing inflation in the economy.

Consequently, the central bank changes the interest rates with the aim of monitoring and regulating the economic growth in the country. Besides, while positive economic growth is considered to be favorable to the country therein, and excessive economic growth is quite harmful ("Interest Rates Are Rising for All the Right Reasons"). For instance, as mentioned earlier, a rapidly growing economy can experience hyperinflation which may create numerous problems such as deterioration of the value of the country's currency, increases the levels of unemployment, reduced tax revenues, and more importantly, it increases the cost of living. On the other hand, an economy with no growth indicates that it is stagnant and it this stands a chance to experience the deflationary spiral. In this case, the favorable level of economic growth lies in the middle, and the deferral reserve is responsible for ensuring that a country maintains this particular favorable economic condition.

Work Cited

"Fed Plans To Continue Raising Rates, Despite Trump'S Ire". Nytimes.Com, 2018, https://www.nytimes.com/2018/10/17/business/fed-interest-rates-trump.html. Accessed 22 Nov 2018.

"Interest Rates Are Rising For All The Right Reasons". Nytimes.Com, 2018, https://www.nytimes.com/2018/10/11/upshot/interest-rates-are-rising-thats-great-news-for-most.html. Accessed 22 Nov 2018.

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