Episode Transcript
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Speaker 1 (00:01):
Welcome to Brainstuff, a production of iHeart Radio, Hey brain
Stuff Lauren Vogelbaum. Here. The Federal Reserve raised interest rates
by point seven five percentage points on July. It was
the fourth interest rate hike in just five months, and
a duplicate of the rays they made in mid June.
(00:23):
It came at the conclusion of their July Monetary policymaking meeting.
They made the decision in order to attempt to relieve
historic inflation, and officials indicate that they will be raising
interest rates again in September by either point five or
point seven five percentage points. But what did these back
to back to back increases mean for the average American
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who has a credit card, mortgage, or bank account. First,
let's discuss the Federal Reserve System, also called the FED.
The FED is the central bank of the United States.
It's made up of three bodies. Is the Federal Reserve
Board of Governors. This is the governing body of the
Federal Reserve System. It oversees the operations of the Fed's
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second body, which are the twelve regional Federal Reserve Banks
which hold federal funds. The third is the Federal Open
Market Committee, which sets national monetary policies. Working together, these
three bodies of the FED are responsible for the operation
of the U S economy. Its goals are ostensibly to
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oversee the U S monetary policy to promote employment, stable prices,
and reasonable long term interest rates. To stabilize the US
financial system, to minimize systemic risks in the US and abroad.
To promote dependable individual financial institutions and monitor their impact
on the entire US financial system. To foster payment system
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safety and efficiency to the banking industry and the US government.
And to support consumer protection via research and analysis, community
economic development activities, and administration of consumer laws and regulations.
The Federal Reserve is not funded by Congress. Instead, it's
funded by the interest earned on securities it buys of
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plus fees it receives for services that it provides to
banking institutions, including check clearing and fund transferring. All net
earnings on the Federal Reserve banks are transferred to the
US Treasury. Okay, but what does all of this have
to do with raising interest rates? The Federal Reserve uses
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interest rates to fight inflation, which is currently at a
forty year high. As part of its mandate, the FED
is obligated to maximize employment and keep prices stable. When
the economy and job market are both strong, as they
are now, the FED can focus on reducing inflation. Inflation
is when prices increase, a meaning that the value of
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a dollar decreases. You're not getting the same bang for
your buck, and that the squeeze that we're feeling now.
Federal Reserve Chairman Jerome Powell explained in a press statement
on July, the Fed's monetary policy actions are guided by
our mandate to promote maximum employment and stable prices for
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the American people. My colleagues and I are acutely aware
that high inflation imposes significant hardship, especially on those at
least able to meet the higher costs of essentials like food, housing,
and transportation. We are highly attentive to the risks high
inflation poses to both sides of our mandate, and we
are strongly committed to returning inflation to our two percent objective.
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One of the primary ways that the FED attempts to
curb inflation is by raising short term interest rates. The
idea here is that raising short term interest rates increases
borrowing costs for banks. They pass those costs onto consumers
and businesses in the form of higher rates on long
term loans. That essentially makes every being more expensive. But
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that's the goal to reduce consumer demand, which has overwhelmed
supply and thus driven prices up. Higher rates will make
it more expensive for consumers to have credit cards, student loans,
or home or car loans. The problem is inflation is
currently so high that reducing it could require the highest
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interest rates in decades, which could weaken the economy. So
is this all bad news in the short term? Perhaps,
and the FED is trying to slow inflation without causing
recession at what's known as a soft landing. But many
of the factors driving current inflation are beyond the fed's control,
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including things like the surge and crude oil prices and
other commodities resulting from Russia's invasion of Ukraine, as well
as pandemic related lockdowns in China, which exacerbated supply chain disruptions.
The Powell said in another press statement on June, our
objective really is to bring inflation down to two percent
while the labor market remains strong. I think that what's
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becoming more clear is that many factors that we don't
control are going to play a very significant role in
deciding whether that's possible or not. Inflation is soaring globally,
not just in the US. So far in at least
forty five countries have raised interest rates to help combat it,
including Brazil, Saudi Arabia, Switzerland, and England. The European Central
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Bank announced on June nine that it would also raise
its key interest rates by twenty five basis points at
its July meeting. If the FED can achieve a soft
landing and reduce inflation without a recession, that would be
good news for everyone in the long term. Powell remains hopeful,
he said on July quote, We're trying to do just
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the right amount or I'm not trying to have a recession,
and we don't think we have to. We think that
there's a path for us to be able to bring
inflation down while sustaining a strong labor market. Today's episode
is based on the article why does the FED change
the interest rate? On house toff works dot com, written
by Sarah BlimE. Brain Stuff is production of I Heart
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Radio in partnership with how stuff works dot Com, and
it's produced by Tyler Clang. Four more podcasts from My
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