The minutes of the July 2023 meeting of the Federal Open Market Committee indicated that Federal Reserve officials may raise interest rates again in the near future in order to continue to bring down the inflation rate. The year-over-year inflation rate hit a peak in June 2022 at 9.1%. By July 2023, the year-over-year inflation rate was down to 3.2%. This cooling of inflation has come after 11 interest rate hikes, bringing the interest rate up from near-zero to 5.4%. Increasing rates again, it is believed, will help the Fed achieve its target interest rate of 2%.
One of the concerns of the Fed officials is that raising rates could have other adverse effects on the economy. In particular, higher interest rates could increase unemployment and/or reduce output, throwing the economy into a recession. To date, this has not happened, giving many policy makers hope that they could bring the inflation rate with a “soft landing.” In the meantime, they will continue to follow the data in order to determine if the interest rate is too low, too high, or just right.
Discussion Questions:
- Explain how/why raising interest rates can reduce inflation.
- Discuss the other tools the Federal Reserve has at its disposal to influence interest rates. What are the advantages and disadvantages to each?
Source| https://apnews.com/article/inflation-interest-rates-federal-reserve-economy-recession-aa2d6e4362648464433de6e04a8adf0a; Unsplash: Photo by Bastian Riccardi on Unsplash