Interest rates are increasingly becoming a political battleground, something that is not supposed to happen in the American system.
Tennessee Tech Economics Professor Chelsea Dowell said the Federal Reserve raised interest rates in recent years to combat inflation. The Federal Government does not control the Federal Reserve, despite threats from President Donald Trump to fire members of the Fed. Dowell said that is why, no matter which party takes office, there is always a political battle over interest rates.
“So you have these two entities that are really trying to both steer the country in what they think is the best direction, but their policies often counteract each other,” Dowell said. “And so it often causes tension between the two groups.”
Dowell said most of our nation’s growth is tied to a safe, secure, and well-functioning financial system. Dowell said the Federal Reserve having its own power is why interest rates are supposed to be non-political.
“It is very important to us to make sure that we have somebody in charge who has separate power, so they are not being influenced by just politics, but instead having a more neutral, data-driven approach to keeping our financial system safe,” Dowell said.
Dowell said interest rates have steadily risen since the pandemic. Though many complain about the current interest rates, Dowell said, compared to history, the interest rates are not that high.
“July’s effective fed funds rate was 4.33 percent, but in the 1980s it was over 19 percent,” Dowell said. “So, the difference today is that we have just experienced some really low interest rates in more current history through the great recession and the pandemic, and that’s what people got used to.”
Dowell said the employment rate tends to play a role in interest rates. Dowell said a healthy economy in the U.S. is when a net of 200,000 jobs are created each month. Dowell said a recent report showed that the U.S. is net creating fewer than 200,000 jobs per month.
“So now we are in that kind of warning zone,” Dowell said. “We are still not in that job destruction, but it was enough that some red flags went off, and we are paying a little bit more attention to it. So if we see higher levels of unemployment rate, net job losses, these would be things that would trigger potentially a reduction in an interest rate.”
Dowell said the Federal Reserve’s Board of Governors is waiting for a new appointee from Trump. Dowell said Trump’s appointee would have to be approved by Congress. Dowell said the new appointee can impact voting on future interest rates.
