When the Fed Raises Rates? Article Review Example

The New York Times posted an article about if it really matters whether or not the Fed raises their interest rates for the economy. Considering any given supply of currency circulating within the economy, a decreased level in prices will surely lead to an effect of lower interest rates. If interest rates are lower in the economy, then it will become much more convenient as well as easier for both consumer parties and firms in the market to make purchases and borrow money in the form of loans. In turn, the demand for goods or services in the economy will rise.

Bothe higher and lower interest rates are simply a means to an end for the Fed. The Fed’s primary goal is to change output. This may be in the form of either slowing down or speeding up the economy by influencing aggregated demand. The Fed affects interest rates, which in turn affects investments, which is a component of Gross Domestic Product or (GDP), and then finally the GDP itself. Consumption as well as investment activities can depend on interest rates.

The author from the New York Times is correct in suggesting that the Fed thinks it is the right time for the economy to get on its feet as far as raising the interest rates. Suppose the Fed lowers the US interest rates through an open market purchase of bonds. As a result, investors in the US will be earning rather lower interest rates and will seek to invest some of their funds in foreign markets abroad. In order to invest into foreign markets, these investors will need to sell their US dollars or (USD) in exchange for foreign currency of the nation which they plan to invest. This will in turn affect the foreign exchange rate. As more investors sell their USDs in exchange for foreign currencies, the exchange rate will decrease. A significant drop in the foreign exchange rate will decrease the value of the USD. This means that is the Fed chooses not to raise interest rates; then the USD will depreciate in value, giving consumers and investors less purchase power.

The Fed is in a position to make the decision on how they want the interest rates to affect the economy. It is most likely that they will put the increase in effect come September, which is the more adequate decision for the betterment of the economy.

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