Why Were Interest Rates Raised?
The Federal Reserve has made the decision to increase interest rates by 0.25% at the end of 2016, with more dramatic increases to follow in 2017, news of which was released in December 2016. The decision was made for the interest rate increase of a quarter point to begin at the end of 2016, with two more 0.25% increases to follow over the course of the following year. This increase indicates that the labor market is tightening and thus, the United States economy is improving. Over the past decade, interest rates have only increased 0.25%, with that increase happening at the same time last year.
This change was made in response to the impressive amount of jobs that have been created and maintained over the past year and a half, with unemployment rates now below 5%, the lowest it has been since before the recession. Notably, in 2016, 180,000 jobs were added a month, which has led the Federal Reserve to allow interest rates to increase due to borrowers’ ability to pay more for loans and return to the ideal of 2% inflation. The interest rate hikes in 2017 could follow quickly after President-elect Trump’s taking to office, due to his pledge to provide growth oriented tax cuts and increased spending on infrastructure.
How This Impacts Americans
The reason this rate increase may matter to both young and older Americans is because the Federal Reserve raising interest rates then forces banks to charge customers more to borrow money, whether it is in loans and mortgages or on credit cards. This increase in variable interest rates then decreases what consumers can spend using discretionary money. In return, businesses may be affected if the consumer is not buying as much, as often.
Additionally, for those who rely on trust income, they may see investments affected by the increase in interest rates. Stock investments may become more risky to those beneficiaries or grantors, who may decide to change their investment objectives. While the interest rate increase should be seen as a positive reaction by the government seeing labor markets tighten, not all parties involved feel that it is best for them. There may be some types of investments that now look more secure, which can be good or bad for investors as well as companies and most importantly here, the consumer.