This week we talk about the Fed, interest rates, and inflation.We also discuss cooling economies, the Federal Funds Rate, and the CPI.Recommended Book: Dirty Laundry by Richard Pink and Roxanne EmeryTranscriptI’ve done a few episodes on this general topic over the past several years, so I won’t get super in-depth about many of the specifics, but the US Federal Reserve has a dual-mandate to keep prices stable and to maximize employment in the country—though that core responsibility has been expanded in recent years to also include regulatory control over banks, providing a variety of services to banks and other savings associations, and doing what it can to moderate long-term inflation rates.A lot of these responsibilities are intertwined, in the sense that, for instance, if you increase interest rates, that can lead to less spending by corporations that might otherwise borrow and spend liberally, creating more jobs; so adjusting one lever often tweaks seemingly disconnected outcomes—which is part of why this agency’s activities often fly below the radar of non-regulation, non-monetary-world people and publications; they’re super-careful with their powers, because one wrong move can cause ripples of discomfort throughout the US and global economy.When one of those metrics they’re meant to moderate goes haywire, on the other hand, they’re all over the news; their every action, even the seemingly unimportant ones, tracked in great details, and breathlessly reported-upon.For a variety of reasons, including the large-scale shut-down of various aspects of society and the global economy, and the consequent disruption of global supply chains, inflation—as measured by CPI, or the Consumer Price Index—shot through the roof, pretty much everywhere on the planet, beginning in 2020.Leading up to that moment, many wealthy countries had been doing pretty well in terms of moderated inflation levels, and the US was no different: year-over-year inflation growth was down to sub-1% levels in 2014 and 2015, and it was close to the Fed’s 2% target level from 2010, when the worst of the 2007-2008 economic crisis had receded, until 2020, when it was down to 1.4%.That year, the Federal Funds Rate, which is the lever the Fed uses to adjust interest rate levels throughout the US government and economy, setting the interest rate banks charge to lend each other money short-term, basically, that number eventually influencing everything from savings account interest payments to mortgage rates to what you can expect to pay for a car loan—that Federal Funds Rate was down to .25% in 2020 and 2021, which is very low, which meant that debt was very cheap and easy to acquire, corporations happily borrowing as much money as they wanted, as it would cost them very little to do so, and that meant expansion across the economy, that expansion further aided by low interest paid on savings accounts and similar, safe-havens for money, which made investing in startups, stocks, and similar, risky investment vehicles more appealing—because the safe stuff didn’t pay much of anything.All of which meant a spending bonanza—right up to the point that COVID-19 started rippling outward from China, and the world’s governments responded with lockdowns and similar, economy-stifling measures.By the end of 2021, year-over-year inflation in the US was up to 7%, from 1.4% the previous year, and it was 6.5% the following year.In 2022, the Fed bumped the Federal Funds Rate from that incredible low of .25% up to 4.5%—a huge jump, and a staggering blow for an economy that was experiencing a dramatic surge in prices; the goal being to slow things down, and consequently, hopefully, also slow that inflation rate.Other factors likewise influenced inflation around the world during this period, including Russia’s invasion of Ukraine, which massively complicated the global energy market, alongside other disruptions, and the weirdening of politics, which have become increasingly tribal and extreme over the past decade or so in many governments around the world, have made it trickier to legislate, and have carried a wave of unserious and obstructive lawmakers into office.That hiking of the Federal Funds Rate ended what’s been called the US’s ZIRP era: a period in which zero interest-rate policy, or so close to zero that it’s essentially zero interest rate policy, defined the shape of the economy, what professions everyone chose to pursue, which players became dominant in their industries, and what sorts of bets made financial and reputational sense.The US, and much of the world, especially the wealthy world, was thus suddenly plunged into a very different financial and regulatory environment, changing its posture and the politics of money and spending, while also queueing things up for a potential future in which inflation might be tackled and the Fed might start adjusting the dial downward once more, tipping the economy back into ...
