Created by Congress in 1913, the U.S. Federal Reserve acts as America’s central bank. As part of its mandate, it serves as the decision-making body for U.S. monetary policy. Its primary tool in implementing this policy is the management of the benchmark fed funds rate, upon which short-term debt is often based.
By influencing the availability and cost of credit, the Fed seeks to manipulate spending, investment, employment and inflation to foster economic growth and stability. Lower interest rates on credit induce consumer spending. Conversely, raising the cost of debt acts as a deterrent, as higher borrowing costs reduce consumer spending on goods and services.
From January 2017-December 2018, the Fed enacted seven 0.25% interest rate hikes. The Fed justified its rate hike agenda by pointing to the continued strength of the U.S. economy. By raising the cost of borrowing, the Fed argued, it could gently tap the brakes on economic growth and inflation, preventing the economy from overheating.
The Fed received tremendous criticism for its interest rate hikes. President Trump, along with many Wall Street heavyweights, argued that rate hikes were not necessary. Yes, the economy was strong, but there was no indication of overheating — which comes in the form of inflation, as strong consumer demand drives prices for goods and services higher. If inflation is too high, rising prices outpace consumer wages, eroding Americans’ buying power.