On Wednesday, March 15, the Federal Reserve announced it had raised its benchmark interest rate by a quarter point – a move likely to have noticeable effects on the economy, and not necessarily positive ones.
In fact, many worry that the move could trigger severe financial consequences, including a long-feared adjustment of the stock market that (according to at least one analyst) could send share prices tumbling 6,000 points to below 15,000 – nearly 30 percent below last week’s close.
Raising rates will also affect other sectors of the economy. Some fear rate hikes could lead to another housing crisis – when interest rates are high, it’s more difficult for homeowners to afford their mortgage payments.
Whatever negative effects the rate hikes will have on the economy, it’s an easy bet they will be blamed on President Donald Trump. The timing of this year’s rate hikes (there are two more projected before the end of 2017) has some wondering whether Janet Yellen and the Federal Reserve are playing politics and using the accelerated rate increases as a means to undermine Trump and his presidency.
Could this be true? Let’s look at the evidence.
It should be understood that raising the benchmark interest rate at this point in time is something of a “damned-if-you-do, damned-if-you-don’t” proposition.
While Obama was in the White House, the Fed kept interest rates at a minimum in an attempt to stimulate the economy. Although the strategy may have been somewhat successful, it has led to massive overvaluation of stock and the creation of a financial bubble that sooner or later has to burst.
The Fed’s rationale for raising rates now is based on what it sees as a strengthening economy with a healthy labor market – and one that is likely to create “wage and price inflation” in the near future.