The Federal Reserve - Essay Example

Low-interest rates have several impacts on the state of the economy. When interest rates are low, savers get very little returns; hence, they are discouraged from holding money, thus, prefer to spend it. It also makes borrowing cheap meaning that individuals and firms will be encouraged to borrow more and spend on investment. In addition, the low-interest rates will lead to depreciation of the currency value, as people would prefer to save in another country with better interest rates. The high spending will lead to an increase in aggregate demand, which will in turn lead to an increase in the rate of inflation.

            Keeping the interest rates low can be a means of stimulating economic growth. In the recent past, the global rate of economic growth has been low. By keeping the interest rates low, there will be a decrease in the value of the dollar. This will make imports more expensive, thus, encouraging people to buy locally produced goods, leading to an increase in aggregate demand for domestic products that will, in turn, lead to an increase in output, productivity, and employment. Therefore, when there is a high rate of unemployment, the Feds can keep the interest rates low, a factor that will have an eventual impact on stimulating the growth of the economy.

            The amount of investment in bonds and treasury bills will be affected by the current and expected rate of interest. Investors will invest their money in the stocks or bonds that they expect will have the highest rate of return. If the rate of interest is expected to remain low, investors will tend to invest more as they expect aggregate demand to increase which in turn will translate to higher business earning and returns. If they expect the rate of interest to rise, they will tend to invest in short-term bills.

            Interest rates affect the price of bonds. The price of the bond is inversely related to the interest rate. As the rate of interest rises, the price of the bonds decreases, and decreases the price of bonds increases. This influences the activities of governments and businesses as they use bonds to raise money for expenditure.

            Interest rates are also likely to influence the standard of living in several ways. First, the rate of inflation affects the ability of people to buy basic products. When inflation is high people, will not be able to meet their basic needs. In addition, changes in interest rates will affect the returns of businesses, rates of employment, and government programs such as pension schemes, thus having a direct effect on people’s ability to procure products they need (Nicolaci da Costa para 10-11).

            In conclusion, the interest rate is one of the main drivers of the economy; hence, the decision by the Fed to set the interest rates will affect many sectors of the economy.