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Speaker 1: Welcome to Brainstuff, a production of iHeart Radio, Hey brain

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Speaker 1: Stuff Lauren Vogelbaum. Here. The Federal Reserve raised interest rates

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Speaker 1: by point seven five percentage points on July. It was

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Speaker 1: the fourth interest rate hike in just five months, and

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Speaker 1: a duplicate of the rays they made in mid June.

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Speaker 1: It came at the conclusion of their July Monetary policymaking meeting.

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Speaker 1: They made the decision in order to attempt to relieve

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Speaker 1: historic inflation, and officials indicate that they will be raising

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Speaker 1: interest rates again in September by either point five or

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Speaker 1: point seven five percentage points. But what did these back

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Speaker 1: to back to back increases mean for the average American

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Speaker 1: who has a credit card, mortgage, or bank account. First,

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Speaker 1: let's discuss the Federal Reserve System, also called the FED.

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Speaker 1: The FED is the central bank of the United States.

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Speaker 1: It's made up of three bodies. Is the Federal Reserve

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Speaker 1: Board of Governors. This is the governing body of the

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Speaker 1: Federal Reserve System. It oversees the operations of the Fed's

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Speaker 1: second body, which are the twelve regional Federal Reserve Banks

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Speaker 1: which hold federal funds. The third is the Federal Open

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Speaker 1: Market Committee, which sets national monetary policies. Working together, these

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Speaker 1: three bodies of the FED are responsible for the operation

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Speaker 1: of the U S economy. Its goals are ostensibly to

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Speaker 1: oversee the U S monetary policy to promote employment, stable prices,

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Speaker 1: and reasonable long term interest rates. To stabilize the US

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Speaker 1: financial system, to minimize systemic risks in the US and abroad.

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Speaker 1: To promote dependable individual financial institutions and monitor their impact

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Speaker 1: on the entire US financial system. To foster payment system

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Speaker 1: safety and efficiency to the banking industry and the US government.

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Speaker 1: And to support consumer protection via research and analysis, community

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Speaker 1: economic development activities, and administration of consumer laws and regulations.

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Speaker 1: The Federal Reserve is not funded by Congress. Instead, it's

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Speaker 1: funded by the interest earned on securities it buys of

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Speaker 1: plus fees it receives for services that it provides to

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Speaker 1: banking institutions, including check clearing and fund transferring. All net

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Speaker 1: earnings on the Federal Reserve banks are transferred to the

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Speaker 1: US Treasury. Okay, but what does all of this have

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Speaker 1: to do with raising interest rates? The Federal Reserve uses

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Speaker 1: interest rates to fight inflation, which is currently at a

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Speaker 1: forty year high. As part of its mandate, the FED

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Speaker 1: is obligated to maximize employment and keep prices stable. When

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Speaker 1: the economy and job market are both strong, as they

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Speaker 1: are now, the FED can focus on reducing inflation. Inflation

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Speaker 1: is when prices increase, a meaning that the value of

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Speaker 1: a dollar decreases. You're not getting the same bang for

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Speaker 1: your buck, and that the squeeze that we're feeling now.

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Speaker 1: Federal Reserve Chairman Jerome Powell explained in a press statement

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Speaker 1: on July, the Fed's monetary policy actions are guided by

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Speaker 1: our mandate to promote maximum employment and stable prices for

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Speaker 1: the American people. My colleagues and I are acutely aware

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Speaker 1: that high inflation imposes significant hardship, especially on those at

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Speaker 1: least able to meet the higher costs of essentials like food, housing,

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Speaker 1: and transportation. We are highly attentive to the risks high

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Speaker 1: inflation poses to both sides of our mandate, and we

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Speaker 1: are strongly committed to returning inflation to our two percent objective.

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Speaker 1: One of the primary ways that the FED attempts to

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Speaker 1: curb inflation is by raising short term interest rates. The

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Speaker 1: idea here is that raising short term interest rates increases

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Speaker 1: borrowing costs for banks. They pass those costs onto consumers

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Speaker 1: and businesses in the form of higher rates on long

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Speaker 1: term loans. That essentially makes every being more expensive. But

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Speaker 1: that's the goal to reduce consumer demand, which has overwhelmed

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Speaker 1: supply and thus driven prices up. Higher rates will make

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Speaker 1: it more expensive for consumers to have credit cards, student loans,

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Speaker 1: or home or car loans. The problem is inflation is

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Speaker 1: currently so high that reducing it could require the highest

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Speaker 1: interest rates in decades, which could weaken the economy. So

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Speaker 1: is this all bad news in the short term? Perhaps,

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Speaker 1: and the FED is trying to slow inflation without causing

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Speaker 1: recession at what's known as a soft landing. But many

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Speaker 1: of the factors driving current inflation are beyond the fed's control,

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Speaker 1: including things like the surge and crude oil prices and

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Speaker 1: other commodities resulting from Russia's invasion of Ukraine, as well

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Speaker 1: as pandemic related lockdowns in China, which exacerbated supply chain disruptions.

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Speaker 1: The Powell said in another press statement on June, our

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Speaker 1: objective really is to bring inflation down to two percent

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Speaker 1: while the labor market remains strong. I think that what's

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Speaker 1: becoming more clear is that many factors that we don't

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Speaker 1: control are going to play a very significant role in

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Speaker 1: deciding whether that's possible or not. Inflation is soaring globally,

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Speaker 1: not just in the US. So far in at least

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Speaker 1: forty five countries have raised interest rates to help combat it,

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Speaker 1: including Brazil, Saudi Arabia, Switzerland, and England. The European Central

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Speaker 1: Bank announced on June nine that it would also raise

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Speaker 1: its key interest rates by twenty five basis points at

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Speaker 1: its July meeting. If the FED can achieve a soft

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Speaker 1: landing and reduce inflation without a recession, that would be

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Speaker 1: good news for everyone in the long term. Powell remains hopeful,

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Speaker 1: he said on July quote, We're trying to do just

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Speaker 1: the right amount or I'm not trying to have a recession,

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Speaker 1: and we don't think we have to. We think that

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Speaker 1: there's a path for us to be able to bring

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Speaker 1: inflation down while sustaining a strong labor market. Today's episode

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Speaker 1: is based on the article why does the FED change

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Speaker 1: the interest rate? On house toff works dot com, written

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Speaker 1: by Sarah BlimE. Brain Stuff is production of I Heart

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Speaker 1: Radio in partnership with how stuff works dot Com, and

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Speaker 1: it's produced by Tyler Clang. Four more podcasts from My

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Speaker 1: wherever you listen to your favorite shows.