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RHINELANDER, Wis. (WJFW) – The Federal Reserve raised interest rates by 0.75 % earlier this month in an effort to fight inflation. The Central Bank uses the interest rate as a tool to cool the U.S. economy when needed. With the drastic increase in inflation over the past 18 months, it was their next answer to the problem.
“It’s a difficult time for consumers,” said Marc von der Ruhr, professor of economics at the Schneider School of Business & Economics at St. Norbert College.
As last reported by the Bureau of Labor statistics, inflation rates sat well above average at about 8.6 percent.
“Interest rates affect the cost of borrowing. So as interest rates rise, anything that we borrow money for it to be more expensive for us as we repay those loans,” said von der Ruhr.
For the Fed, it’s a balance between managing demand and supply. Essentially, the hope is that higher interest rates can help decrease spending.
“What the Fed is hoping to do is to dampen the demand side by dampening investment and consumption through the higher interest rates,” said von der Ruhr.
Less spending helps to clot the bleeding circulation of money in the economy.
“If you’re not borrowing and inflation rates, come down, the cost of living is becoming more affordable again,” said von der Ruhr.
However, von der Ruhr believes that a lower cost of living may come with a price.
“If we want lower inflation, we’re probably going to be facing higher unemployment and what we’re willing to tolerate, as a society, as an economy, is the key question. if some households then lose their jobs, that has some significant economic consequences for them personally, that we don’t want to disregard,” said von der Ruhr.
For legislators, it’s an act of weighing out each consequence. Unfortunately, von der Ruhr believes there is no easy solution.
“There are some very conflicting signals in the data right now, which I think make it that that make it that much more difficult for policymakers to have a policy that will make everybody as happy as possible,” said von der Ruhr.
Ultimately, the recent interest rate hike is only an attempt to make the economy more manageable for the average American.
“The bottom line is, there’s a tradeoff. If you want lower inflation, through monetary policy, you’re risking higher unemployment. If you can tolerate higher inflation, you’ll be able to have lower unemployment,” said von der Ruhr.
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