Interest Rate Increase and Long Term Growth Rate, Essay Example

According to the perceptions of several officials in US Federal policy, the timing and importance of raising the interest rate is important to economic growth in long-term. According to the policy rates of US Fed the interest rate has been maintained to near zero over a period of about 7.5 years. The decision to raise the interest rates therefore is an important development of the last 16 months. The most important issue of concern to the market participants after the increase in the federal fund rate entails the entire anticipated trajectory that is associated with the policy.

The market interest rates according to the viewpoint of an economist should be a reflection of entire anticipated future trend in the interest rates on short term. For instance, the interest rates for a loan issued to purchase a car repayable in five years should depend on anticipated rates of interest over the total five years to come but not on the immediate rates. The timing of the increase in the interest rates has no significant implication on the total cost of the loan in the long run. The tools used in the management of economy function best under the influence of financial markets. Consequently, the interpretation of Fed’s word by the bond traders is an issue of great importance.

The most appropriate approach to the scenario is effective management of peoples’ expectations to avoid an assumption that, an increase based on quarter-percentage point implemented in September will consequently lead to extremely higher rates in the future.

The increase in the interest rate is interpreted by the marketers as an evidence of collapsing economy thus requiring the termination of the era associated with ultra-cheap money.

Works cited

Neil Irwin. Does It Really Matter Exactly When the Fed Raises Rates?, 2015