Should the Federal Reserve raise interest rates?

Photo by Dan Smith, License: CC by 2.5

Note: If you want to gain a basic grounding into government policy and its effects on currency, please read my previous article on the aforementioned subject.

Within the sphere of economics and economic thought, the discussion which has overwhelmingly prevailed, above others, is that of whether the Federal Reserve, the central bank of the United States, should raise interest rates or not. At the current moment, the tide seems to have shifted towards a tightening of rates, however, the opposition towards an interest rate rise is still unyielding. Economic scholars, who believe that an interest rate hike is the right way to go, assert that the hike will boost job growth through an increase in both opportunity and actual cost of automation, and that it will boost consumer spending, according to the Keynesian model. However, proponents of keeping rates stable argue that a hike would send financial markets into turmoil, perhaps even worse than their late August plunge. Funnily enough, the one minim that both sides agree on is that whatever happens, a Fed rate hike would change the global economic landscape forever. However, in this article, the case for raising interest rates will be argued, as that is precisely what I firmly agree should happen.

When one looks at the facts, they would find it indubitable that corporations would not want to invest in automation with higher interest rates, as the amount of money which they have to pay back is larger than before. Owing to this, companies would find it more profitable to simply employ human workers, who, with the addition of being smarter than automation in that they can apply themselves to every situation, have the guarantee of all of them not simultaneously crashing, which would cause a momentary disaster in the production wing of the company. Therefore, when applying cost-benefit analysis to the situation, the companies may see this as the straw on the camel’s back, as, unlike before, in a near zero interest rate environment, the cost of automation will simply be too much, given the obvious drawbacks which it has at the moment. Although it is only an incremental increase in interest rates, for these businesses, every unit of currency is important and there is no point purchasing something that will yield a loss in the long term, given the restrictive monetary policy being applied.

There is also the issue of inflation. Some major economists argue that the Federal Reserve are waiting far too long to raise interest rates, and that this is potentially a fatal error, in that this massive duration of time with accommodative monetary policy will give rise to soaring inflation levels. Of course, the elderly dependents of the USA, amongst others, will suffer the most from this, as the value of the money which they have saved up in banks will decrease at a rapid rate. In addition, it punishes first time home buyers while making stock traders and the like richer. Obviously, this kind of thing is the bane of an economic liberal’s existence, and it is clear to see that morally, this is not right. Therefore, one could make the moral argument that the Federal Reserve should raise interest rates in order to protect the elderly and the vulnerable of the USA, while restoring some semblance of equality to a massively divided nation. Although there is no guarantee that this will happen, there is nothing wrong with protecting against unforeseen circumstances.

Some also argue that the US economy is strong enough to handle a rise of 25 basis points. From the previous bottom, stocks are up over a hundred percent, so therefore, they argue that the financial markets are a non-issue in the Federal Reserve’s decision. With this chain of reasoning, it can be stated that we have already waited too long to begin the process of economic normalisation, and that in order to get the US economy up and running again, we must raise interest rates, at least incrementally to begin with. Labour force participation rates are at the same levels as 1977, under the Carter administration, and so to get ourselves out of this mess which we have put ourselves in to, we must make things normal again and raise interest rates. This raise in rates, although small numerically, will be a gigantic step in the right direction, and will mean that the savers, elderly, and first time buyers in the economy are saved.

By Shrey Srivastava

A finance and economics enthusiast, and someone who wants to share his views with the world.

1 comment

  1. In a domestic sense, you seem to put forward a reasonable argument. However with the US being the largest economy in the world, should it act responsible?. A rise in rates, could see a massive outflow of capital from already stagnating developing economies. A debt crisis in the developing world is on the horizon, however surely this could only precipitate the crisis. A hike could see a rise in the value of dollar–dominated debt, and it could force these countries into raise their interest rates, to prevent “capital flight.”

    A 25 basis point raise, is unlikely to have to that detrimental effects on the already troubled developing worlds. I am just curious, do you think the US should act completely in her own interests, or act in the interests of the global economy?



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