Tuesday, June 21, 2016

Feds Still Expect Slow Economic Growth

Federal Research Chairman cites uncertainties that will make them cautious on raising interest rates. In testimony to Congress she indicated the potential fears as they relate to EU, China, and the domestic economy that make raising interest rates quickly over the next few years less likely. It is expected that growth will stay under 2% countering the need to raise interest rates.

The purpose of raising interest rates is to make borrowing money more expensive and in turn slow down the economy. A big question people ask is why would someone want to slow down the economy? There is an optimal growth point where too slow is not good and too fast is not so greater either.

Let us say that the economy is zooming along at 10%. You would find inflation rising, wages would stay behind, and people would not be able to keep up with increasing expenses. Most of the country would be employed but there would be significant labor shortages. The ideal rate is somewhere between 2 to 3.5% with an inflation rate of 2%

When the economy is sliding along at a slow pace we will soon find that raising interest rates are counterproductive to the needs of economic encouragement. Cheaper money means that companies can borrow on a commercial level and then invest in their businesses and operations. It also means consumers can get a good rate on buying houses and products to keep the economy going.

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