Recent news from the head of the FED Janet Yellen has led to an increase in confidence that interest rates will be raised. The meaning behind the potential rise of interest rates is two-sided. While some are scared and unsure about the implications of the increase, others see the positive side of what the increase actually means. In 2008 when the U.S. experienced the Great Recession, the FED dropped the interest rate to zero. By dropping the rate to zero, the FED intended to get the economy back on its feet. More than 6 years later the rate has barely moved. This is because the Great Recession was so destructive that confidence and stabilization of the economy has only recently been regained. CNN reports that “just before Yellen’s speech, the odds for a March rate hike has climbed this week to 77% from 30% on Monday, according to the CME Group.”
So, what does this mean? How is the increase in interest rates really going to affect the economy? More importantly how does this affect the Trump Administrations intent to grow 4%, which would exceed PGDP? Going back to intro economics or macro theory, we know that if interest rates increases, the cost of borrowing also increases, therefore investment will decrease and saving increase. Basically, an increase in interest rates slow down economic growth. This seems to completely goes against the Trump’s Administrations desire to grow. Evidently, the FED and the Trump administration have two very different agendas and it does not seem like they are communicating. There are a lot of expectations for the U.S. economy right now, and the two big players in the game do not have the same view. Right now, no one is confident in what is to come.