By: Hong-An Phan
What is interest and why do economists find it so interesting?
As of Wednesday, August 14, the buzz about the world of finance is centered on the discussion of inflation. For years, the American population has been on edge due to rising prices. From gas to eggs, inflation has decimated market pricing and greatly damaged the reputations of politicians and government leaders.
Yet today, the inflation rate has lowered greatly- measuring 2.9%. According to an article by Christopher Rugaber of PBS, “Consumers and business owners collectively expect lower inflation in the coming months and years, surveys show, a trend that can itself hold down price increases.”
Since the pandemic, supply chains and increased demand have increased inflation in recent years. Many may remember the crowds of households rushing to buy toilet paper, canned foods, and emergency supplies to hold in their stock during the worldwide crisis.
However, with inflation decreasing, the center of attention is fixated on the Federal Reserve- the central bank of the United States of America. The general anticipation is for the Fed to cut rates, specifically interest rates.
But how is our economy centered around interest rates?
The basic understanding of our economy centers around supply and demand. When an item is created, people will want to buy it, which is representative of demand. Supply depends on demand- if there is high demand then there is more incentive to create that product and adjust the prices so the market will reach an equilibrium.
However, there is also demand for things that may not be easily afforded. For one, businesses may need to make high-cost investments or young adults will want to purchase cars and houses for themselves. In these situations, loans are required.
Banks will loan out their money with an interest rate that helps them bring in revenue. With lower interest rates, industries such as the housing market are more accessible. Alternatively, when rates are high, businesses have less encouragement to invest in their work. This results in a lack of market growth and a gradual halt in the expansion of the economy. However, the Fed will often raise rates to combat inflation. By discouraging spending, prices can decrease, and in time, inflation.
The Federal Reserve states that its priority is to “The Federal Reserve policymakers on the Federal Open Markets Committee seek to set interest rates that create the conditions needed to achieve the mandate given by Congress—to promote maximum employment and stable prices.”
Now, all eyes are on the Fed as economists anticipate them cutting rates soon. With a decrease in interest rates, does this signal the end of a period of heightened inflation? Only the actions of consumers and businesses will tell.
Photo by Austin Distel, Unsplash.
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