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Running Head: IMPACT OF INTEREST RATES Impact of Interest Rates Conner Paty Tarleton State University
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2 IMPACT OF INTEREST RATES Impact of Interest Rates The Federal Reserve has decided to raise interest rates for the third time this year, which is odd, considering for the past ten years there has been a zero-interest rate policy. The actions of the federal reserve spark a lot of questions like “How is this going to effect the economy?” and “How will this affect me?”. This paper will include a discussion of how rising interest rates will impact short-term and long-term rates, providing a rationale for the rising interest rates. The Federal Reserve Bank has the consistent challenge of balancing the economic balance of the economy. When there is high unemployment, low wages and low demand for goods, like in 2008, the Federal Reserve bank must take the appropriate action to stimulate spending by not just consumers but businesses as well. Therefore, the zero-rate policy was put into place back in 2008 and held that position for eight years. The Federal Reserve Bank started to make marginal increases in 2015 to interest rates as the economy was showing continue patterns of growth of stability. As the economy continued to be strengthened for the next two years the focus on the economy and ensuring that a strengthened economy did not turn into accelerated inflation rates. As the demand for goods increases and consumers become more active in purchasing goods and services, that demand drives businesses to increase their price for goods and services. This increase is called inflation. Basically, an increase the cost for the same goods and services that were provided at a lower rate before. The Federal Reserve Bank tries to keep the harmony of inflation around 2% year over year. To avoid an inflation rate above 2%, the federal reserve back will start to increase the cost of interest rates in efforts to slow the consumer spending which in turn keeps the demand for goods and services at a point where businesses do not increase prices in access of 2%. This is the trend that we have seen throughout 2018 and will likely continue to
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