Are the government’s interest rates in your interest?

Are the government's interest rates in your interest?

Image courtesy of Inkcinct

Jack Yan, News Editor

The 2008 financial meltdown was called “the worst financial crisis since the Great Depression.” Now almost seven years later, the United States has shown remarkable economic gains following this. The United States’ GDP growth in the coming decade is projected to be at or over 3 percent. United States unemployment has dropped to the Federal Reserve’s target rate of 5.5 percent. With this rapid increase in pace of the US economies, fears have again risen over finance’s ancient enemy: Inflation rates. The Federal Reserve has received a push to raise interest rates, which have remained stagnant at around 0.25 percent, to combat any possible rise in inflation and encourage savings and investments. However, the Federal Reserve would do well to heed the advice of Nobel Prize winning economist Paul Krugman, who says not to “pull that rate-hike trigger, until you see the whites of inflation’s eyes.” Federal Reserve Chairwoman Janet Yellen, is in danger of cutting short the US economic recovery just one year into her new position.

Raising the federal interest rates poses a clear danger to the average American worker, because it would increase income inequality. Since 2008, our economic growth has been fueled by increases in business investment because of the Federal Reserve policy of Quantative Easing, which was just recently wound down. The issue is consumer spending has not increased at the same pace as our economic growth. Considering that wage growth has only grown at the same pace as consumer spending, clearly we can’t afford to hurt consumer spending. If the Federal Reserve were to raise interest rates, this would encourage consumers to save, because they receive a bigger benefit for saving. This leaves less money available for spending, undercutting consumer spending. This would result in slower wage growth, especially for poorer Americans. As NPR points out, since 1980, the wage growth for the bottom 50 percent of American in terms of wealth, has remained stagnant, while wages for the top 50 percent have skyrocketed. The Federal Reserve, by raising interest rates is in danger of magnifying this problem.

On top of a fall in wage growth, raising the interest rate would hurt the average American because it would undercut job growth. Currently the unemployment rate is at the target rate of 5.5 percent, but this does not show the full picture. This rate does not provide evidence of those who are long-term unemployed or who have left the workforce. According to the United States Bureau of Labor Statistics, the number of working-age Americans who are claiming to have left the workforce is increasing. In actuality, the job market has not made as much gain as we would have expected. The Federal Reserve, by raising interest rate, would encourage businesses to invest and save their money because they receive a greater reward. This leaves less money for them to spend on capital, namely on hiring more workers. This would slow down job growth, making it more difficult for those who are seeking a job to find one, and even more difficult for those who have given up to find one. The Federal Reserve, by raising the interest rate, is in danger of creating a lost generation of American workers who have given up.

The Federal Reserve is charged with maintaining the monetary policy of the United States, but also is in charge of overseeing the overall well-being of the US economy. The United States was founded on the ideal to create equality and protection for all. The Federal Reserve is in danger of failing this if they listen only to wealthy business owners. They are losing touch with the average American, and may prove this into the coming year, if they choose to raise interest rates. Once again, the American people may be failed by our overly complex bureaucracy.