Higher Interest Rates

In the article “In A Shift, Interest Rates Are Rising” written by Nathaniel Popper and Peter Eavis for the New York Times, it is voiced that the low interest rates that are present within the economy will no longer exist.  The article states that banks and other lenders are recently demanding higher payments on the loans and bond which are driving interest rates up.  With the indication of higher interest rates, people who have borrowed money to invest are now selling the investments in fear that they cannot afford the higher interest rates including people who invested in foreign stocks and bonds.  These investors are pulling out causing markets around the world to be disrupted.  American’s also worry that higher bond yields will cause the Federal Reserve to halt its efforts to pump money into the economy.    When Ben Bernanke declared that there would most likely be a decline in the Federal Reserve’s actions to keep interest rates low to stimulate the economy; many were skeptical on how this would be possible since the economy has not made a drastic incline.  Not only will individual American’s be hurt by the potential of rising interest rates but the U.S. government will certainly be affected when they borrow money.  Higher interest rates for many governments could be devastational when most are already struggling with debt.  Some economists have conflicting opinions when it comes to whether the housing market will be affected by the rising interest rates.  Some say that being able to afford current mortgage rates is a problem, increased rates would create a bigger one (Popper & Eavis, 2013). 

  If the Federal Reserve decides to stop its efforts towards an expansionary policy when the economy has not proven itself to be well on its way to a full recovery, RGDP will definitely fall.  Expansionary policy is a monetary policy used by the Federal Reserve to increase the economy’s money supply .  America’s RGDP is the size of output from America that has been measured with a consistent price.  If the Fed stops the expansion, money supply will decline which causes interest rates to rise which negatively effects investments by lowering them.  This cause and effect sequence is called the Monetary Transmission Mechanism.  Investments are a positive factor in an economy that needs recovery.  Money that is invested becomes another person’s salary.  A higher rate of investments gives the people confidence in the future outlook for the economy, lower investing causes uncertainty which causes people to pull out of stocks and bonds which lowers money supply.  In conclusion, if rates do rise, I believe America will be taking steps backward instead of forward in regards to the recession.

Works Cited

Popper, N., & Eavis, P. (2013, June 11). In A Shift, Interest Rates Are Rising. Retrieved June 23, 2013, from NYTimes.com: http://dealbook.nytimes.com/2013/06/11/in-a-shift-interest-rates-are-rising/

http://dealbook.nytimes.com/2013/06/11/in-a-shift-interest-rates-are-rising/