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The Federal Reserve Importance Essay

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Updated: Apr 25th, 2021

  1. The Federal Reserve officials have raised rates for their short-term interest, which they use as a benchmark, three times this year. They intend to carry out another percentage point increase during the next meeting of the bank, which will happen on 19 Dec. 2018. The number of increments planned for 2019 is uncertain at the moment. Current projections display a roughly equal split between two, three, and four increases. However, the next meeting of the institution will result in updated projections, which may display different results. The article expects that some of the officials may choose to reduce the number of increases they believe to be necessary due to the outcry from the stock market.
  2. The article identifies three potential macroeconomic concerns that may induce the Fed to slow down its interest rate-raising campaign. One of them is the possible faltering of the consumers, whose activity fueled the 2018 expansion. The recent heavy selling of retail stocks and the resulting drop of corresponding shares may be an indicator of such a tendency. Furthermore, credit spreads have increased lately, with U.S. corporate bonds being 4.18% above comparable Treasury securities on average. The change may not be indicative of significant trends if viewed on its own, but it has correlated with economic recessions in the past. The Fed Chairman has noted that the organization will closely observe this specific trend. Lastly, the rising mortgage rates can present difficulties for the economy’s growth as well, as they reduce the affordability of house construction and therefore reduce activity in the housing sector. The rise has already been reflected in the 6% decrease in building permit requests.
  3. The Federal Reserve’s purpose in raising the rates is to slow down the expansion of the economy, particularly the speculative parts such as borrowing and spending. By keeping growth under control, the Fed intends to avoid the appearance of a financial bubble of the sort that led to the end of the last two expansions. Higher interest rates will counteract increased housing construction activities, which led to the home price bubble of the 2000s. They will also slow the growth of individual businesses, discouraging potential investors from buying stocks due to reduced expectations of profit. As a result of the overall suppression of the economy, the country’s economic output will grow at a slower pace, but it will keep increasing regardless. Price levels will increase due to the overall policy that discourages spending, but they will not become unmanageable for consumers.
  4. I think that the Fed should at the very least delay its next rate increase until the middle of 2019. The increment planned for Dec. 19 appears to be a decision that the Fed will not reverse, but further activity in the field requires caution. The economy is already displaying signs of weakening, and its growth should not become unmanageable in the near future. A more extended observation period would help analysts establish the significant variables in the current economic growth and make more accurate predictions based on them. Furthermore, the Fed’s current policy appears to be experimental and still untested, which calls for a slower, more careful approach. Ideally, the method should be tested when the economy is not experiencing any turbulence. However, since that scenario is practically impossible in reality, decisive action should be reserved for situations where the economy is approaching either of the two extremes of growth.
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IvyPanda. 2021. "The Federal Reserve Importance." April 25, 2021. https://ivypanda.com/essays/the-federal-reserve-importance/.

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IvyPanda. (2021) 'The Federal Reserve Importance'. 25 April.

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