Etiqueta: Friedman

The Federal Reserve is going to announce today their decision on interest rates, and there has been a lot of speculation about what this will mean for the economy. In this blog post, we will explore the five key consequences of the Federal Reserve interest rate decision.

What is the Federal Reserve interest rate?

The Federal Reserve interest rate is the main tool the Federal Reserve uses to control inflation. The Federal Reserve sets the interest rate by voting on a set of interest rates, which are then sent to banks across the United States. Banks then use this information to set their own interest rates.

When the Federal Reserve sets the interest rate, it affects a variety of different things. For example, it affects how much money people can borrow. This in turn  affects how much people can spend, and how much money businesses can make. It also extends to how much people can earn in retirement.

What are the 5 key consequences of the Federal Reserve interest rate decision?

The Federal Reserve’s decision to raise interest rates will have a number of important consequences. Here are five of the most significant ones: 

1. The most important consequence and what the Fed is looking for with its monetary policy these days is to curb inflation. The Federal Reserve sets the interest rate by voting on a set of interest rates, which are then sent to banks across the United States. Banks then use this information to set their own interest rates. And this then carries the following additional consequences:

2. Higher borrowing costs for businesses and consumers: When the Fed increases interest rates, it makes it more expensive for borrowers – including businesses and consumers – to borrow money. This can lead to decreased spending, which in turn causes economic slowdown. 

3. Less investment: When interest rates rise, it becomes more expensive for companies and individuals to invest in assets like stocks or homes. This can mean that less money is available for new businesses and projects, which could lead to overall stagnation in the economy. 

4. More financial volatility: when interest rates go up, the amount people earn each month (and consequently their ability to save) goes down – this can lead to huge swings in stock prices and what people are able as comfortable saving (for example during tough times). 

5. Overall diminished wealth : when costs rise due to higher interest rates there’s a greater chance that those who already have less riches will fall behind even further – this has been shown repeatedly throughout history as rising Interest Rates has always led economies into recession/depression

If there is a risk of recession/depression, why is the Federal Reserve applying these interest rates increases?

The Fed has more fear of an uncontrolled inflation spree than a temporary dip into a mild recession. Being both unwanted and bad for the economy, a wild inflation scenario is a real destroyer of the economy and it would take several years to defeat it. A soft and short recession, if arriving, can be less damaging. Unfortunately, there seems to be no effective tools to avoid both dangers from arising, what can stop inflation can produce recession.

But the Federal Reserve has teams of sharp minds that analise each incoming economic data and, like a pharma laboratory, very carefully desgin specific remedies to address the different situations. Unfortunately, the complexity of the economy is similar to that of the human body, and these remedies should be tested first in a controlled environment to measure and improve its effectiviness. This is not the case, naturally, so trial and error and quick adjustments is what they can do for now.

I’ll finish this quick post with Milton Friedman and his smart view of inflation and its cure.

Remember, the decision will be announced today at 20:00 CET, followed by Mr. Powell’s Press Conference at 20:30 CET