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Fed Hikes Interest Rates — Again

In response to surging inflation, the Federal Reserve has hiked its federal funds rate, with economists warning it risks a recession.

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CNBC
Jonathan Good
Leans Left
Stephen Webber
Leans Right
Rachel Zelicof
Leans Left

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With inflation surging to a four-decade high last month, pressure has increased on the Federal Reserve — often called the Fed — to take more aggressive steps to combat rising prices. The Fed is the United States’ central bank and oversees the nation’s monetary policy. Among other goals, the Fed sets a target inflation rate of 2% each year — far below current levels. Since March, the Fed has repeatedly raised the federal funds rate to combat surging inflation, including a 0.75% increase on Wednesday — the largest hike since 1994. Yet economists say that such rapid hikes could negatively impact economic growth and warn a recession might be on the horizon.

Combating Inflation

Inflation. According to Investopedia, “inflation is the decline of purchasing power of a given currency over time.” This means that one dollar cannot buy the same amount of goods or services as it could in years past. While moderate, steady inflation promotes spending and marks a healthy economy, rapidly rising prices are problematic. Currently, record inflation is straining Americans’ wallets, especially as groceries and gas prices continue to increase. Prices rose 8.3% from last year — the largest jump in the past 40 years.

Federal Funds Rate. The Fed plays a key role in moderating inflation primarily by changing the federal funds rate. The Federal Open Market Committee (FOMC) sets this rate for banks to borrow and lend money to one another. The federal funds rate has varied wildly, from a historic high of 20% in the early 1980s to near-zero levels during the Covid-19 pandemic. Following Wednesday’s hike, the target range is 1.5-1.75%. The Committee’s decision to raise this rate effectively makes borrowing more expensive for consumers and drives down demand. This reduced demand can lower prices.

Fed’s Economic Outlook. The 0.75% rate hike is a drastic step to rein in inflation, and Fed Chairman Jerome Powell said that he does not expect such increases to be common. However, the FOMC says it will continue to raise rates until it sees “compelling evidence” that prices are decreasing. Yet even amid the economic uncertainty, the Committee released a generally optimistic statement about the economy, touting an increase in overall economic activity, “robust” job gains, and low unemployment. It expects inflation to be substantially tamer next year, with its projections showing a 2.6% rate — slightly higher than its preferred target but a sharp decrease from its current levels.

Impact on Americans

Rate Hike Impact. The Fed’s rate hike will have ripple effects throughout the economy and impact American consumers in various ways. Concerns over how the Fed’s actions could weaken economic growth have already contributed to a volatile stock market, with stocks dropping notably and traders becoming more and more nervous. Its persistent increases will also drive up mortgage rates and loans without fixed interest rates — such as car loans and credit card debt. Consequently, financial analysts are encouraging consumers to pay off any debt that they currently have.

Lowering Prices. While the Fed plays a significant role in driving the money supply, impacting supply and demand and thus inflation, it does not have the tools to address many other factors contributing to rising costs, like clogged supply chains and labor shortages. Additionally, experts say the move will have a minimal impact on surging food and gas prices. While raising interest rates decreases borrowing and demand, it does nothing to address supply shocks in those markets, such as those created by Russia’s invasion of Ukraine and ensuing sanctions.

Looming Recession?

What is a Recession? A recession is a sustained period of significant economic decline. Analysts have traditionally measured it by two consecutive quarters (six months) of declining economic performance, though the modern definition considers other factors, such as increasing unemployment. Recent polls have shown many Americans are increasingly fearful that the U.S. is on the verge of a recession.

Doubts About a “Soft Landing.” In raising interest rates to combat inflation, the Fed has repeatedly asserted the idea of achieving a “soft landing” — a term economists use to describe a slowdown of growth that does not induce a recession. However, many economists are increasingly doubtful that the Fed will be able to reduce inflation without causing a downturn. If the Fed raises interest rates too quickly, they risk decreasing consumer demand too much and harming the economy, driving businesses to lay off workers. In the past five times that inflation peaked above 5%, a recession followed, raising doubts that the Fed can successfully tighten rising prices without inducing one this time.

Left Narrative

We must be clear — the economy will face short-term pains to combat rising inflation. Yet Republicans are weaponizing Americans’ pain, wrongfully and knowingly pinning sole blame on Democrats. Any economist will tell you that their talking points are lies. Incredibly complex circumstances have combined to cause surging prices, such as the Covid-19 pandemic, Russia’s invasion of Ukraine, and lagging supply chains. Further, their false messaging has given greedy corporations a cover to hike prices and weakened consumer confidence, prolonging economic suffering.

Left-Lean Narrative

Right-Lean Narrative

Right Narrative

Months ago, President Biden received a letter from oil associations listing recommendations for mitigating the coming recession. These included proposals like eliminating tariffs which increase the price of goods, reducing federal spending, and removing regulations. In response, Biden sent a letter insulting oil executives as greedy, and rather than accepting his policies have devastated America, he blamed Russian leader Vladimir Putin for the economic crisis. The Democrats are driving the economy into the ground as Americans begin to realize the only economic fix is to vote for Republicans.

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  1. Do you think the Federal Reserve is handling inflation well? Why or why not?
  2. Do you agree with the actions taken by the Federal Reserve to stabilize the economy? Why or why not?
  3. What steps do you believe the government can take to mitigate inflation?
  4. Do you think we are headed towards a recession? Why or why not?
  5. Do you think there are ways we can avoid moving into a recession? Explain your answer.

Current Events

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Accompanying Content

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min
Vox
Stopping inflation is going to hurt

Vox argues that the economy will feel worse before it gets better but says that a recession is not inevitable.

Article
Jun 15, 2022
Left
Bias
min
Slate
Joe Biden Didn’t Do This

As Republicans continue to blame President Biden for inflation, specifically rising gas prices, Slate argues that there is no merit to that claim.

Article
Mar 15, 2022
Left
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min
Reason
Recession ‘Virtual Certainty’ as Interest Rates Spike

On Wednesday, the Federal Reserve raised interest rates by three-quarters of a percentage point, following a 0.5 percentage point increase in May and a 0.25 percentage point increase in April.

Article
Jun 16, 2022
Leans Right
Bias
32
min
Ben Shapiro
Joe Biden Is Running The Economy Into An Iceberg | Ep. 1515

The stock market continues its drop as the Federal Reserve considers spiking interest rates; Joe Biden compensates by screaming at Americans; and Democrats begin dreaming of an alternative to Biden.

Podcast
Jun 15, 2022
Right
Bias
2
min
Marginal Revolution University
What Is the Federal Funds Rate?

This video explains the federal funds rate and how it impacts consumers.

Video
Jun 5, 2018
Neutral
Bias
min
Oil and Gas Associations
Letter to President Biden on the Economy

Letter sent to President Biden by 10 oil and natural gas associations with recommendations and criticisms.

Press Release
Mar 18, 2022
Right
Bias
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