The basic dilemma facing the Federal Reserve is this: Low interest rates promote economic growth but create the risk that the economy will “overheat” with too many dollars chasing too few actual goods and services — causing inflation. Today, the Fed announced it was raising rates for the first time since 2006, signaling that it is starting to worry more about inflation and less about jobs and growth.
The weird thing about this is that the Fed’s own forecasts show inflation getting lower, not higher.
Continue reading: The Fed’s own data contradicts its case for raising interest rates
Further reading: Fed raises interest rates, citing ongoing U.S. recovery
Commentary by The Secular Jurist: A basic motivation must be considered with respect to inflation fears. Those who have money, particularly those who have a lot of money, really hate inflation because it devalues their financial assets over time. Using a simple example, a savings account earning 1% interest on a balance of $100,000 actually loses purchasing power for the account holder when the aggregate cost of goods and services (i.e. inflation) rises above that to say 2%. Conversely, those without significant financial assets (i.e. the working poor) aren’t as directly impacted by inflation as long as their wages keep pace. Therefore, this long-anticipated move by the Fed to raise interest rates, even though inflation fears have yet to be realized, suggests that it is responding – at least in part – to special interest pressures and not necessarily to sound economic principles.