Consequences of Raising Federal Reserve Interest Rates

Below is a piece of academic writing I did for an Economics class. The prompt was to hypothesize and analyze what would happen if the Fed raised the rates by 2.75%. I hope to share some of my other Economics work here, and I invite any criticism or difference of opinion, as it will help us all learn. Thanks for coming!

In the next six months, if the United States Federal Reserve Bank raised interest rates by 2.75%, we would see a decline in consumer spending. As the interest rate went up, commercial bank fees would go up as well, causing the end consumer to slow spending and increase saving, leading to a decrease in demand. All of this is associated with cost, as pointed out by James Baldwin at Investopedia, “As rates rise, people are also less likely to borrow or refinance existing debts, since it is more expensive to do so.” (Baldwin).

This would impact business starts and closures greatly. According to a video published by TD Ameritrade, explaining the Federal Reserve Bank and how it influences the economy, “Businesses will reduce expansion and consumers will start to consume less.” (TD Ameritrade) This is due to the rising of commercial lending banks’ rates ascending parallel to Federal Reserve rates make borrowing, and therefore expanding, unattractive. The same is to be said of opening a business with the market the way it is.

I would expect the unemployment rate to go up concurrently, but not at the same rate as the Federal interest rates. As banks borrow from the Federal Reserve at a higher rate, and those price increases are seen by the consumer, the season of spending and growing ceases. Businesses slow and hire less, factories produce more and hire less.

As prices fall and demand slows from the 2.75% increase, we will see the inflation rates drop. Prior to this increase, the country most likely saw an increase in the prices of goods and services, predicated by a period of spending and economic growth. Now as the literal and metaphorical purse strings are drawn closed, we will see inflation drop with the prices of goods and services.

I would need a lot more information before suggesting this interest rate increase. As it stands right now, I’m not sure I see now as the proper time to increase rates. As the Covid-19 vaccine received it’s FDA approval and vaccination rates are back on the rise, the United States may soon be poised for a full economic recovery. As we tread back into the waters of prosperity, the terrain will look undoubtedly different. In my opinion, having that time be met with economic growth seems to be the best option for recovery.

Citations Baldwin, J. G. (2021, September 15). The impact of interest rate changes by the Federal Reserve. Investopedia. Retrieved September 20, 2021, from https://www.investopedia.com/articles/investing/010616/impact-fed-interest-rate-hike.asp.

TD Ameritrade. (n.d.). What Does The Federal Reserve Do? Youtube. Retrieved from https://www.youtube.com/watch?v=Ug_q97QKDjk