In a recent interview, Susan Schmidt Bies (Federal Reserve Board Governor) spoke about the recent elevation in interest rates. She discussed the need for an increase in interest rates which would help the economy reach its full growth potential. She stated,"You cannot keep short-term interest rates below the rate of inflation -- it's too accommodative. We've got to get to what we call a neutral level."
Currently, the inflation rate is a few points higher than the interest rate. The government has plans to continue to raise interest rates slowly over time in order to balance out the economy. I would like to hear some opinions on this topic. I think everyone agrees that it's about time to start raising interest rates, but how high should they go? Who will initially be affected by the changes? What kind of an impact will this have on our current economy?
3 comments:
This is interesting because the post was made shortly before we cover these issues in class (rather than after, or more typically not at all ... since students interests are more wide ranging than the texts).
I'd like my students to think about:
1) Why the short term interest rate should be above the rate of inflation?
2) There are a lot of different interest rates, and the inflation rate is not higher than most of them. Why is that?
3) Why one of your fellow students thinks it is time to raise interest rates. This may be right or wrong, but what basis does Skip have for saying this? Does he know something you don't?
Skip, can I get you to go back and add a title to this?
Here we go, with some comments on comments. These were not great, so I won't name names.
What's going on is the Federal Reserve is starting to put the brakes on the economy. The are worried about the potential for future inflation. This typically results from AD shifting to far to the right. To counteract this they are nudging it to the left.
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