I understand why increasing interest rates can negatively affect the economy, but why would the Feds raise the rate because of the positive jobs report?
I always assumed that more people employed means more discretionary spending leading to more corporate profits.
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First off – economics can be very counterintuitive, and also very complicated. What’s good for the goose isn’t always good for the gander, so to speak.
Many economists consider an “ideal” state of the US economy to have an unemployment rate of about 5%. That means that there is a pool of people looking for jobs, and a pool of people that a company can turn to if they need to hire and expand.
If the unemployment rate is below that, if a company wants to hire someone, they likely have to try to entice someone who works for another company to quit and come join their company. Doing that means offering a higher salary. Doing that puts pressure on companies to increase the salaries of existing workers so they are content or don’t quit.
This increase in wages means there is more discretionary money in the economy “chasing” the same amount of goods and services, which leads to inflation.
The Federal Reserve has two primary missions – low inflation and high employment, or rather price stability and maximum employment. The two very often are at odds with one another, and getting the economy into a “balanced” state is what they strive for.
In times of high unemployment they slash interest rates so it’s cheaper to borrow money to expand businesses and buy cars and houses so that more people can get jobs. In times of high inflation and low unemployment they hike interest rates so that people spend less, and companies can’t expand and may even start laying people off and people buy less cars and houses, etc. This increases the unemployment, which under some models will bring down inflation.
Yes, everyone likes the idea of “everyone” having a job. In reality it can cause the economy to “overheat” and drive prices up.
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