The Federal Reserve has announced that it will be raising interest rates for the second time since the 2008 financial crisis. Two implications come from this. First, The Fed believes that the economy is healthy enough to grow sustainably. And second, they believe that inflation is becoming a growing problem more dangerous to the United States economy than a recession.
The Federal Reserve's decision is puzzling for a variety of reasons.
Central Banks raise interest rates to combat inflation. But where's the inflation?
A small amount of inflation (typically 2-4 percent) is healthy for the economy. It encourages investment and discourages people from hoarding money. Central Banks will often set a target for the inflation rate. If inflation is too low, they'll lower interest rates to encourage more people to borrow money and spend it into the economy. If inflation is too high, they'll raise interest rates, making it harder to borrow.
So The Federal Reserve choosing to raise interest rates makes little sense because inflation came in at only 1.7 percent, which is lower than the 2 percent target The Fed set.
Their reasoning was that there's typically a lag between monetary policy decisions and results, and they feared inflation could catch up. But preventing runaway inflation by raising interest rates is one step forward one step back. Because of these interest rate hikes, it'll be harder for people to borrow and pay back loans, and it'll be more expensive to invest. The Fed's purpose is to stabilize prices but it can't do that at the expense of people's economic well-being.
Many believe that an economy is best run by monetary policy, but this has proven to be ineffective. We're far from full employment. There's empty factories, idle resources, and millions of unemployed people. Raising interest rates will make this situation worse. If the United States wants to keep inflation under control without making life for the everyday citizen worse, it should utilize fiscal policy instead. Increase spending to spur more output, creating more goods and services for the economy, and raise taxes when you reach an inflationary situation of too much money chasing too few goods.