Fed Raises Interest Rates Right Before Major Election
The United States Federal Reserve chose last month to raise interest rates from 2 percent to 2.25 percent, making it more expensive for banks to borrow money. In most recent days, President Donald Trump has criticized the central bank’s actions as “a mistake” for putting an undue burden upon the economy and negatively impacting the economic growth of his administration, especially right before a hotly-contested round of midterm elections. Despite the tensions, the Fed has stated in a recent meeting they have no plans to alter their rate hike, and Trump has does not plan to fire the chairman despite his criticisms.
The Federal Reserve has been a controversial institution since its birth in 1913, and is responsible for governing over the country’s money supply by loaning to all other banks beneath it from massive national banks such as Bank of America and Chase to local credit unions. By adjusting the rates at which they loan, they indirectly affect the rates given to consumers and have a diffuse but noticeable effect on the population’s spending behavior that drives the economy.
By increasing the interest rate like they are doing now, consumer banks will have to charge higher rates for their home, auto and personal loans, as well as credit cards used for day-to-day spending, which will make people more hesitant to buy new products and decreasing the productivity of the economy. Rates are increased typically to combat inflation, but Trump is claiming the inflation rate is not high enough to warrant this increase. He has been particularly harsh in recent statements to reporters, calling the Federal Reserve “crazy” and “moving too fast,” also insinuating the recent drops in the stock market—the worst since February—were caused by fears of slowing growth due to the Fed’s rates. He acknowledged that, as an independent organization, the reserve cannot be ordered to change its decisions by the president.
Since voters tend to see the economy as a measuring stick for politicians’ success, Trump was upset about the Federal Reserve deciding to slow economic growth during his term, and not during his predecessor’s. He pointed out that Barack Obama had “zero interest” during his administration, which made it easier for consumers to spend, remarking “how the hell do you compete with that?” The Federal Reserve has declined to comment on the situation so far, but the reason is probably that President Obama took office during the worst recession in recent history. Without regards to inflation, the Fed was happy to pour money into the economy to get it growing again. Once the recession finished at the tail end of Obama’s presidency, the need to control inflation once again became an issue, prompting a series of rate hikes in 2018.
It is generally considered bad practice for a president to publicly criticize the Federal Reserve’s decisions, lest they shake investor confidence in the reserve’s ability to make good economic policy. If people believe the nation’s money supply is inaccurate or, worse, unpredictable, it will prompt an even greater selloff of stocks and investments than we are currently experiencing. This happened before in 1907, which prompted the very creation of the reserve system we have today.
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