Question

The Federal Reserve often changes interest rates in the United States. Some participants in the U.S. economy would prefer to let interest rates be fully determined by markets instead. What do you think? Do you imagine you would be better off if markets determined interest rates? Do you think the U.S. economy as a whole would be better off? As you answer, discuss the issues with the current system of Fed-determined rates and the issues with a system in which markets determine rates.

Answer 1

If markets determined interest rates it wpulr largely off balance and destabilise economy as markets demand interest rates for profit booking and seek maximum returns on their investment andnhrnce lead largescale deviation and fluctuations causing economic crisis and makes cinsukers worse off as their investment appetites reduce due to higher risks. This would propel a sharp plunge in GDP and enirmous confusion on stock exchange as well as asset classes and throttoe economic activity to uncertainty causing other smaller economies to get affected as well.

Ded determined interest rates are calinratedbased on global scenario and economic indicators and hence are comprehensively jusrified with strong unanimousviews of Monetary policy committee.

This causes stability and sound judgement and shows clear path of economic roadmap in future. However drawback being Fed may oppose Government's fiscal policy which can create reverse effects on economy like Donald Trump proposes expansionary fiscal policy but US Fed suggests contractionary monetary policy which is completely opposite and thus creates sharp degrowth.