WEBVTT - Why Does the Fed Change the Interest Rate?

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<v Speaker 1>Welcome to Brainstuff, a production of iHeart Radio, Hey brain

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<v Speaker 1>Stuff Lauren Vogelbaum. Here. The Federal Reserve raised interest rates

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<v Speaker 1>by point seven five percentage points on July. It was

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<v Speaker 1>the fourth interest rate hike in just five months, and

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<v Speaker 1>a duplicate of the rays they made in mid June.

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<v Speaker 1>It came at the conclusion of their July Monetary policymaking meeting.

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<v Speaker 1>They made the decision in order to attempt to relieve

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<v Speaker 1>historic inflation, and officials indicate that they will be raising

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<v Speaker 1>interest rates again in September by either point five or

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<v Speaker 1>point seven five percentage points. But what did these back

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<v Speaker 1>to back to back increases mean for the average American

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<v Speaker 1>who has a credit card, mortgage, or bank account. First,

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<v Speaker 1>let's discuss the Federal Reserve System, also called the FED.

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<v Speaker 1>The FED is the central bank of the United States.

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<v Speaker 1>It's made up of three bodies. Is the Federal Reserve

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<v Speaker 1>Board of Governors. This is the governing body of the

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<v Speaker 1>Federal Reserve System. It oversees the operations of the Fed's

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<v Speaker 1>second body, which are the twelve regional Federal Reserve Banks

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<v Speaker 1>which hold federal funds. The third is the Federal Open

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<v Speaker 1>Market Committee, which sets national monetary policies. Working together, these

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<v Speaker 1>three bodies of the FED are responsible for the operation

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<v Speaker 1>of the U S economy. Its goals are ostensibly to

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<v Speaker 1>oversee the U S monetary policy to promote employment, stable prices,

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<v Speaker 1>and reasonable long term interest rates. To stabilize the US

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<v Speaker 1>financial system, to minimize systemic risks in the US and abroad.

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<v Speaker 1>To promote dependable individual financial institutions and monitor their impact

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<v Speaker 1>on the entire US financial system. To foster payment system

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<v Speaker 1>safety and efficiency to the banking industry and the US government.

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<v Speaker 1>And to support consumer protection via research and analysis, community

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<v Speaker 1>economic development activities, and administration of consumer laws and regulations.

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

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<v Speaker 1>funded by the interest earned on securities it buys of

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<v Speaker 1>plus fees it receives for services that it provides to

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<v Speaker 1>banking institutions, including check clearing and fund transferring. All net

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<v Speaker 1>earnings on the Federal Reserve banks are transferred to the

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<v Speaker 1>US Treasury. Okay, but what does all of this have

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<v Speaker 1>to do with raising interest rates? The Federal Reserve uses

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<v Speaker 1>interest rates to fight inflation, which is currently at a

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<v Speaker 1>forty year high. As part of its mandate, the FED

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<v Speaker 1>is obligated to maximize employment and keep prices stable. When

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<v Speaker 1>the economy and job market are both strong, as they

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<v Speaker 1>are now, the FED can focus on reducing inflation. Inflation

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<v Speaker 1>is when prices increase, a meaning that the value of

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<v Speaker 1>a dollar decreases. You're not getting the same bang for

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<v Speaker 1>your buck, and that the squeeze that we're feeling now.

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<v Speaker 1>Federal Reserve Chairman Jerome Powell explained in a press statement

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<v Speaker 1>on July, the Fed's monetary policy actions are guided by

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<v Speaker 1>our mandate to promote maximum employment and stable prices for

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<v Speaker 1>the American people. My colleagues and I are acutely aware

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<v Speaker 1>that high inflation imposes significant hardship, especially on those at

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<v Speaker 1>least able to meet the higher costs of essentials like food, housing,

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<v Speaker 1>and transportation. We are highly attentive to the risks high

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<v Speaker 1>inflation poses to both sides of our mandate, and we

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<v Speaker 1>are strongly committed to returning inflation to our two percent objective.

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<v Speaker 1>One of the primary ways that the FED attempts to

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<v Speaker 1>curb inflation is by raising short term interest rates. The

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<v Speaker 1>idea here is that raising short term interest rates increases

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<v Speaker 1>borrowing costs for banks. They pass those costs onto consumers

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<v Speaker 1>and businesses in the form of higher rates on long

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<v Speaker 1>term loans. That essentially makes every being more expensive. But

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<v Speaker 1>that's the goal to reduce consumer demand, which has overwhelmed

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<v Speaker 1>supply and thus driven prices up. Higher rates will make

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<v Speaker 1>it more expensive for consumers to have credit cards, student loans,

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<v Speaker 1>or home or car loans. The problem is inflation is

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<v Speaker 1>currently so high that reducing it could require the highest

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<v Speaker 1>interest rates in decades, which could weaken the economy. So

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<v Speaker 1>is this all bad news in the short term? Perhaps,

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<v Speaker 1>and the FED is trying to slow inflation without causing

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<v Speaker 1>recession at what's known as a soft landing. But many

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<v Speaker 1>of the factors driving current inflation are beyond the fed's control,

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<v Speaker 1>including things like the surge and crude oil prices and

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<v Speaker 1>other commodities resulting from Russia's invasion of Ukraine, as well

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<v Speaker 1>as pandemic related lockdowns in China, which exacerbated supply chain disruptions.

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<v Speaker 1>The Powell said in another press statement on June, our

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<v Speaker 1>objective really is to bring inflation down to two percent

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<v Speaker 1>while the labor market remains strong. I think that what's

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<v Speaker 1>becoming more clear is that many factors that we don't

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<v Speaker 1>control are going to play a very significant role in

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

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<v Speaker 1>not just in the US. So far in at least

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<v Speaker 1>forty five countries have raised interest rates to help combat it,

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<v Speaker 1>including Brazil, Saudi Arabia, Switzerland, and England. The European Central

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<v Speaker 1>Bank announced on June nine that it would also raise

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<v Speaker 1>its key interest rates by twenty five basis points at

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<v Speaker 1>its July meeting. If the FED can achieve a soft

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<v Speaker 1>landing and reduce inflation without a recession, that would be

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<v Speaker 1>good news for everyone in the long term. Powell remains hopeful,

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<v Speaker 1>he said on July quote, We're trying to do just

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

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<v Speaker 1>and we don't think we have to. We think that

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<v Speaker 1>there's a path for us to be able to bring

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<v Speaker 1>inflation down while sustaining a strong labor market. Today's episode

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<v Speaker 1>is based on the article why does the FED change

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<v Speaker 1>the interest rate? On house toff works dot com, written

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<v Speaker 1>by Sarah BlimE. Brain Stuff is production of I Heart

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<v Speaker 1>Radio in partnership with how stuff works dot Com, and

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<v Speaker 1>it's produced by Tyler Clang. Four more podcasts from My

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