The Federal Reserve and Interest Rates
The Federal Reserve is increasing interest rates in an effort to control inflation and maintain price stability. It raises the federal funds rate, or the rate at which banks lend money to each other, in order to slow down economic growth when it observes that prices are rising faster than is sustainable for the economy.
This increase in interest rates makes borrowing money more expensive for consumers, resulting in less consumption and cheaper pricing. Additionally, the Fed monitors different economic indicators, such as consumer price indexes and other inflation indices.
If the Federal Reserve determines that rising inflation is becoming a problem, they will increase interest rates further to maintain stable prices. The Fed’s aim for yearly inflation is approximately 2%, therefore when this number becomes excessively high, they will increase interest rates to bring it back down.
Managing Inflation
The principal instrument used by the Federal Reserve to manage inflation is the federal funds rate, which controls the money supply and interest rates. It’s important to stay out of debt while the Federal Reserve is increasing interest rates.
Banking institutions increase their lending interest rates to compensate for the higher cost of borrowing from one another. This makes it more expensive to borrow money from banks and other lenders, which makes it more expensive to carry a balance on your credit cards, finance homes or cars.
In addition to influencing goal employment levels, the Fed employs monetary policy to guarantee stable economic growth. By increasing or decreasing interest rates, the government can stimulate or discourage companies and consumer borrowing.
During the pandemic, the government was printing money at an astronomical rate which is what caused inflation to begin with. When there’s too much money floating around, people spend more money which increases demand and the prices go up with it. When there’s less money in the economy, people spend less so the prices go down to a level that people are willing to spend.
Interest rates have an impact on the money supply and can be used to control inflation. The Federal Reserve, which is responsible for determining interest rates, continually examines economic data and maintains a finger on the economy’s pulse. This has resulted in intense disputes over what course of action should be taken regarding interest rates when indicators of inflation appear.
The Federal Reserve has been raising interest over the past year to try to get inflation under control, but is it working? It’s too early to tell, but it’s a good idea to only buy what you need and stay out of debt until the economy becomes more stable.
