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How Did The Federal Reserve Increase Interest Rate

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On March 15, 2017, the Federal Reserve has risen its interest rate by 0.25 percent. With this increase, the minimum interest rate that investors demand on their investment increased from 0.75 percent to 1.0 percent. This is the second increase in a span of 3 months, with the previous one occurring during December 2016. With two increases happening so quickly, pulling the interest rate away from zero which occurred during the economic depression of 2008, people finally have more money to spend as the Federal Reserve is increasing borrowing costs. Before December 2016, the economy was growing much more slowly than it is now, as it had been 12 months before the Federal Reserve had increased the interest rate. This increase is a sign that the …show more content…

This increase translates in a reduction of borrowing power as borrowers will have to pay more in interest. At the moment, the increase does not affect the economy as much because it was a very small increase. However, if this trend continues, it might actually have a big impact on the economy as the interest rate will accumulate to bigger percentages. The increase in interest rate will affect car payments, students loans, and many other loans. Although most borrowers are being affected by this increase, it is important to mention that not all payments will be immediately affected as not every loan has a fluctuating interest rate. For borrowers, having a fixed interest rate is good as they will be paying less than what the marker demands, and for the lenders, it might be terrible as they will be paid less than the market rate. Regardless of fixed and fluctuating interest, I would say that the borrowers are the biggest losers in this situation and lenders and investors are the biggest …show more content…

Because investors have a certain return that they demand on their investment, they are less likely to give out loans for which the interest rate is fixed, which can be worth less in the future. Moreover, if for any chance loaners give out loans with a fixed interest rate, the nominal rate will probably be higher than on loans with a fluctuating interest rate. The interest rate is higher on loans with fixed interest rate because lenders want to make sure that their investment will still be worth the same in the future regardless of the changes in interest rate and inflation. Loans with fixed interest rate will have a high interest rate to compensate for changes in economy, and the real rate will be enough to generate the return that lenders want for their investment. In other words, this increase does not have a big impact for investors because they can raise the interest rate for loans that have a fluctuating interest rate, and the loans with a fixed interest rate will have a higher interest rate. This situation assures that investors are prepared for changes that are expected to happen on the economy, and they assure that their investment will generate the required

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