Question

1. The Federal Open Market Committee is planning to raise the Federal Funds rate at least twice this year. In light of current events is this a good idea?

Answer 1

The FOMC is looking to raise the benchmark interest rates at least twice this year due to sustained inflationary pressures as well as strengthening economy. With every rise in the interest rates, the borrowing becomes costly for both consumers and businesses as well as the banks will have to increase the variable borrowing rates for the risk assessments and lending, leading to increase in short-term borrowing rates relatively to the long-term borrowings as well as rise in the deposit rates. At the same any additional hike in the interest rates accelerates the l borrowing costs for the central government and leads to higher national debt. Rise in interest rates negatively impacts the businesses profits as the cost of borrowing increases and consumer spending decreases.

In light of current quarter’s strong GDP growth, robust employment markets, recovering corporates earnings as well as cleaner balance sheets of banks coupled with lower inflations warrant rise in the interest rates.