Question

Discuss the impact of the recent Federal increase in short-term interests rates on the US economy.

Answer 1

The Federal Reserve reduced the target range for its benchmark interest rate by 0.25% on September 18, 2019. It was the second time in 2019 that the Fed cut rates in an attempt to keep economic expansion from slowing down in the face of many signs that the recession is well under way. The hope is that borrowing costs would decrease by cutting rates, causing businesses to take out loans to hire more people and expand production.

As interest rates rise, there are real-world implications on how consumers and businesses can access credit to make the purchases they need and manage their finances. It even affects the coverage of some people. This article discusses why consumers will pay more for the resources needed to make purchases and why companies will face higher costs associated with increasing their operations and payroll spending when the target rate is increased by the Federal Reserve.

A increase in the Fed's rate instantly sparked a spike in the prime rate (called the Bank Prime Loan Rate by the Fed), which reflects the interest rate that banks are lending to their most creditworthy customers. This rate is the one on which other types of consumer credit are based, as a lower prime rate means that banks can raise fixed borrowing costs and variable borrowing costs while determining risks on less creditworthy companies and consumers.

Traditionally, an increase in borrowing rates weighs on consumer spending. Because of better bank rates, both higher credit card rates and higher savings rates provide energy with a slowdown in consumer buying impulses.