Podcast Summary
The Last Mile of Inflation: A Challenging Process: The Fed is working to lower inflation to its target of 2%, but this 'last mile' can be a lengthy and difficult process.
The Federal Reserve raised interest rates by a quarter percent, but even though inflation has dropped to 3%, it's not yet at the Fed's target of 2%. Economists refer to this final push to reach the target as the "last mile of monetary policy," which can be a challenging and lengthy process. Despite recent improvements, the Fed is not forecasting a recession, but getting inflation down to the ideal 2% rate is not an easy feat. Stay tuned as we explore why the last mile of inflation can be such a hard-fought battle. This message comes from NPR sponsor, American Express. American Express Business Gold Card offers powerful backing for your business, with 4x points on up to $150,000 in purchases per year in your top 2 eligible spending categories. Terms apply. Learn more at americanexpress.com/businessgoldcard. Enbridge, a NPR sponsor, is investing over $1 billion a year in renewables and lower carbon solutions, paving the way for a sustainable energy future. Learn more at tomorrowizon.com.
FOMC as a Grill Master: Adjusting Interest Rates to Manage Economy's Heat: The FOMC uses interest rates to control cash flow and prevent an overheating economy, acting like a grill master managing a barbecue grill's airflow.
The economy, much like a barbecue grill, can overheat when there's too much cash flowing around. The Federal Open Market Committee (FOMC) acts as the controller, adjusting the interest rates to manage the cash flow and prevent an overheating economy. Comparing the FOMC to a grill master controlling airflow over coals, loosening the interest rate valve lets more cash in and heats up the economy, while tightening it slows down the economy. Currently, signs suggest the economy is running hot, and the FOMC may need to raise interest rates to prevent overheating, according to Mark Gertler, a professor of economics at New York University.
The Challenges of Lowering Inflation to Target: The Fed faces a complicated decision on interest rate hikes due to the political and economic challenges of lowering inflation from 3% to the target of 2%, as it has already affected wages and expectations.
Despite inflation currently being at 3%, which seems relatively low compared to last year's 9%, the Federal Reserve faces a complicated decision regarding interest rate hikes. The closer the inflation rate gets to the target of 2%, the more politically contentious and economically challenging it becomes for the Fed to implement further tightening. This is due to the fact that inflation has already filtered into wages, which are less flexible and can take time to adjust. Additionally, inflation expectations, or what people anticipate will happen to inflation in the future, can also contribute to the persistence of inflation at a higher rate. Therefore, even though inflation may seem manageable at 3%, the long-term impact and the challenges of bringing it down to the target make it a complex issue for the Fed.
Fed's Ability to Combat Inflation Limited by Low Inflation Expectations: Low inflation expectations limit Fed's rate hike ability, potentially leading to economic slowdown and job losses, but effects take time to manifest, and recent tightening may not fully play out yet.
The current low inflation expectations, while beneficial in maintaining trust in the Federal Reserve's ability to control inflation, also limits the Fed's ability to raise interest rates and combat inflation effectively. The Fed's actions to raise interest rates can lead to economic slowdown and potential job losses, which is not desirable for the Fed or the public. However, the effects of monetary policy actions take time to manifest, and recent tightening measures may not fully play out for a while. Some argue that the Fed should have paused on rate hikes due to the lag effect and uncertainty about the long-term implications. The Federal Open Market Committee (FOMC) faces a challenging task of balancing the need to control inflation with potential negative economic consequences.
Fed's Inflation Dilemma: Balancing Interest Rates and Economic Recession: The Fed faces a challenging decision: raise interest rates to combat inflation or risk a recession. Meanwhile, high interest rates make real estate assets more affordable, and Fundrise looks to expand its portfolio accordingly.
The Federal Reserve's decision to control inflation hinges on striking a delicate balance. If they don't raise interest rates enough, inflation may persist, but if they raise them too much, the economy could slip into a recession. The Fed's dilemma is complex, and there's no easy solution. Meanwhile, in the world of investing, high interest rates can make real estate assets more affordable. The Fundrise flagship fund is looking to expand its real estate portfolio, taking advantage of this trend. However, as always, it's crucial to carefully consider the risks and potential rewards before investing. In the end, the Fed's moves and the investment landscape are interconnected, and both require thoughtful consideration. This episode was produced by Corey Bridges, engineered by Neil Rauch, fact-checked by Sarah Juarez, and edited by Kate Kinon for NPR. The advertisements come from our paid sponsors, Fundrise and Saatva.
