In simple macroeconomics, open market operations are when the Fed buys or sells bonds in order to swing the economy towards the best possible situation (full employment). Depending on the economy, the Federal Reserve alters its interest rates to influence buying and borrowing in our economy. The rate to borrow money has been fluctuating through times of America’s most significant economic depressions and expansions. At the beginning of 2022 interest rates were set by the Fed at near-zero amounts due to the gradual exit of Covid recessions. However recently, the Fed set a new interest rate in the range of 1.5 to 1.75 percent. Why would the Fed ever do this and how does this small number affect the economy or even anybody you may ask?
Motives of the Feds
The goal of the Federal Reserve for 2022 is to purely limit spending and slow the economy. As bonkers as it sounds, it is very crucial that the economy is decelerated. This is mainly due to two reasons. The first of which is to avoid a recession. The second reason was to avoid stagflation. Stagflation is a term used to describe the state of an economy when its growth slows down, inflation increases, and unemployment becomes more prevalent. Higher interest rates insure more secure prices and maximum employment.
What Changes For You?
First, to state the painfully obvious, with these rising interest rates, money becomes more expensive to borrow. This means that consumers and companies will be less inclined to spend. Therefore, the earnings of businesses will drop as will their stock prices. Want to have a wedding? Well, you better start working overtime! Want to move into your dream condo? Well, you better start working overtime! Want to buy a car? Well, you better start working overtime!
What Does the Future Have in Stock for Us?
From current demographics, analysts predict that the Feds will decrease the interest rate once again in 2023. Finally, the economy would be growing once again. People and businesses would finally be motivated again to borrow and spend. So maybe you will get to buy that Lamborghini or move into Beverly Hills. But who really knows what the future has waiting for us?
