Article Review: Feds Plan to Hike Interest Rates - The Economist (Article Sample)

Article Review
Name
Institution
Article:
R.A. (2015). Feds Plan to Hike Interest Rates. The Economist. Web. Seen on August 31st 2015
Introduction
I will review the article Feds Plan to Hike Interest Rates that was written by R. A. The article is informative and was probably written to educate the readers on economic matters that are yet to come. It was written by a very authoritative website The Economist and hence the contents are worthy of reliance. In reviewing the article, I will begin by summarizing it. Then, I will proceed to discuss potential amendments that have to be made on the 2015 fiscal year budget. After that, I will talk about the pros and cons of the suggestion to amend the constitution by having a balanced federal budget. More discussion will reflect on the historical events in 2006 that resembled the economic issue being discussed. Finally, I will reflect on the impact that the situation is having on my life before making conclusions.
Summary of the Article
The article speaks on the need to raise interest rates. It begins by discussing the prevailing conditions. Apparently, the Federal Reserve has been operating a loose credit policy since 2006 when it last raised the rates to 5.25%. Also, the situation before 2006 was characterized by very low rates from 2001. Now, the agency was hinting on the possibility of resuming the 2% target interest rates officially adopted in 2011. It believes that the only thing holding the national economy from high levels of inflation is the decreasing global oil prices and the strengthening value of the dollar. Nonetheless, these advantages are short term and once they reverse, the nation might find itself in inflation turmoil. The agency also believes that if the interest rates slip past the 2% target people may end up losing faith in the Fed’s ability to control prices. On the other hand, Critics also feel like the Federal Government is overoptimistic about inflation. They believe that the tightening policy will be detrimental, as it will squeeze out emerging economies. Nonetheless, the article points out that the Fed is not taking any chances and they might just as well raise the interest rates any time before the year ends.
Discussion on Necessary Adjustments for 2015 Federal Budget
Raising interest rate has a number of effects on the Federal budget. It will likely increase the cost of credit, and by extension, restrict investments as projects are shelved. To achieve the right impact, the Federal Reserve will have to work hand in hand with the Government’s fiscal agencies like the revenue collection authorities. This cooperation will be significant if the agencies are to avoid the duplication and counteraction of efforts. Thus, in my opinion, some budget estimates like the 10% expected corporate income for the 2015 fiscal year would have to be revised downwards (Federal Budget, 2015). The reason being that expensive credit is disillusionment to investment efforts and many businesses will be opting to postpone investments hence registering lower profits.
The national government should also cut its expenditure. It is not only going to pump more money into the economy and fuel inflation but it also it is going to overstretch the already over ballooned debt burden of $17 trillion (Federal Budget, 2015). It is a painful undertaking in the short term but valuable in the long term. Of particular interest, is the excessive fund set aside for security departments-department of Defense-Military programs, Department of Home Land Securities and NASA programs. These funds total up to 18% of the budget having increased along the years due to increased international security operations (Federal Budget, 2015). It is worth noting that the budget spending has risen from 18% of the GDP at the time of President Bush to 25% in the present fiscal year (Federal Budget, 2015). Also, it would be advisable to raise tax levels on commodities that are classified as luxuries including fashion ware, SUVs, and Champaign. These efforts will support the efforts of the Federal Reserve agency in addition to helping stem inflation.
The Pros and Cons of the Proposed Amendments on the Balanced Federal Budget
Several Federal balanced budget proposals have been floated to amend the constitution. The 2011 Budget Control Act failed to make its way into the Constitution after both the Senate and the Congress shot the efforts down. Apparently, the two houses felt like it was too early to start capping government spending by pegging it on the receipts. Nonetheless, in my opinions, I think that Americans lost the excellent opportunity to tame irresponsible spending behavior both by the Congress and by the President. It was a chance for the present generation to protect the future generation from paying the debts most of which they will never enjoy.
It was also a good opportunity for the Federal government to contain runaway national debt. This year’s fiscal budget has $229 billion (7% of the GDP) being spent on interest payment alone (Peterson Foundation, 2015). Probably, if this amendment had gone through, excessive spending would have been capped decreasing in the process the inflation pressures along the years. That is, it might have resolved the dilemma that the Federal Reserve agency is facing today. Nevertheless, balanced federal budget will come with its own set of challenges. It will seriously limit the ability of the future policy makers in critical times like where there is a need to counter recessions or respond to national disasters.
Similarity to the 2006 Federal Interest Rate Hike
A number of circumstances culminated to 2006’s Federal Reserve interest hike. It had all began with the Congress passing crucial amendments to loosen the Federal Housing Administration down payment standards. These amendments had pressured lenders to extend to borrowers mortgages even where most of them failed to qualify. Also, following the recession that ended 2001, the federal government had slashed interest rates from 6.25% to 1.75% (Lawrence, 2009). In 2002 and 2003, it was reduced further to a record low of 1%. Hence, the resulting excess liquidity and the malpractices in the real estate fueled inflation.
It was not long before problems started. The aftershock of a 5.25% interest hike placed credit out of reach of most companies and individuals (Lawrence, 2009). Existing interest payment obligations that were pegged of the Federal Reserve rates rose to unsustainable levels increasing the number of non-performing loans and squeezing individual disposal income. Companies passed on their financial burdens onto Americans in terms of higher prices placing many goods and services out of reach of families. Families became more cautious with spending behavior often foregoing those things that were not a necessity. Breadwinners in the middle and lower income brackets worked on two jobs to meet the daily consumption of their families (White House, 2015). Yet still, other families became homeless once the banks came knocking on their doorsteps following mortgage defaulting.
It did not stop there. As the recession started, companies began cutting back on their budgets and slashing employment. Unexpectedly, even big banks like Lehman Brothers and AIG filed for bankruptcy (Lawrence, 2009). According to some observers, walking in the streets, one could see faces of terrified people as fears of job losses spread. Then, onwards past 200...