if the economy is doing well why does that make interest rates higher?
In: Economics
The two critical measures (and this gets complicated but in simple terms) that the Fed looks out for is inflation and unemployment. One of their tools is the interest rate. The problem is that these two measures tend to move in opposite directions.
A really fast growing economy tends (not always but usually) to reduce unemployment rate through business expansion, investment in R&D etc. However this also tends to push up inflation as businesses offer higher wages (usually the biggest single cost of running a business) and therefore increase costs to businesses. Also more wages in the economy (broadly a good thing) results in more consumption. Higher consumption can sometimes result in price increases if demand exceeds the ability to produce efficiently.
So broadly speaking lower unemployment at some point correlates with higher inflation. The reverse reasoning also holds true. Low unemployment and higher inflation correlates with a very strong (or overheated) economy which is why interest rate tends to be increased at these times.
Since interest rates take time to impact the economy, what the Fed has to do is to look ahead at many measures of economic performance and predict where they think unemployment and inflation will be in the future and modify their interest rates to mitigate any adverse outcomes. This is rather hard to do since different parts of the economy may be in different states (tech might be booming but say farming might not etc etc) so this prediction is uncertain and might impact certain areas worse than others. Interest rates tend to affect everything and isolating the impact is not feasible.
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