By Daniel Clarke
Opinion Editor & Senior Reporter
As stocks hit all-time highs, long term unemployment remains high, and inflation refuses to occur—central banks around the world aren’t quite sure what to do. The Federal Reserve (the Fed) was created in 1913; as the central bank of the US, its responsibility is to maintain the stability of the financial system.
One of the ways they maintain the economy is by raising or lowering the interest rates they charge to banks. When interest rates are low, it’s easier to borrow money—this spurs economic growth but eventually drives up inflation as growth accelerates. When inflation gets too high, interest rates are raised, slowing economic growth and lowering inflation. The Fed closely monitors the economy to maximize growth and minimize inflation.
Economic indicators suggest our economy to be strong but the Fed has remained hesitant about raising rates, an act done historically to control growth and fend off inflation.
The problem is, inflation remains sluggish despite the strength in our economy, possibly because of the weakness in the global economy. Economic growth has continued but not accelerated as it has in the past, Fed officials have increasingly concluded that the world itself has changed, according to the New York Times.
Interest rates have been low since the Fed lowered them to prevent the economy from collapsing during the housing and banking market crash in 2009 according to Financial Times. Higher interest rates will mean more interest in saving accounts but also make borrowing more expensive. Meanwhile, other parts of the world are experimenting with other ways to increase spending.
A quarter of the global economy, made up of some places in Europe and in Japan, have introduced some form of negative interest rate policies. The goal is to weaken their currency in an effort to stimulate growth. The Fed has also considered the move despite its commitment to raise rates in December according to Financial Times.
While some consider it impossible, the market indicates a 30 percent probability that it would adopt negative rates in December, according to calculations by Bank of America Merrill Lynch. An improbable policy with unknown repercussions, negative interest rates are a new reality around the world.
Mr. Donald Trump has vowed to ‘break the economic bubble’ with numerous policies targeted at accelerating economic growth. Bringing more growth, and hopefully potentially solving the problem temporarily, it would force the Fed to raise rates. Moody’s Analytics fears rates would rise enough to throw the county into a recession having a strongly negative effect on our economy and GDP in the long term.
Central banks, economists, analysts, and governments around the world remain baffled about the Global Economy and are trying new things to improve it. Politically, it has resulted in a sense that everything is broken — that governments aren’t doing their jobs properly.
No one seems to know for sure, neither what is happening nor what to do about it. Whatever happens, understanding what high, low, or negative interest rates have a direct impact on whether it’s the time to take a loan, to save your money in a bank, or stuff it in your mattress.