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Fed Rate Hikes: When to Expect Results

Part of the Federal Reserve's responsibility is to keep the economy in good standing—prices that are not too high (boom) and not too low (bust). One tool the Fed has available to keep inflation in check is interest rates, but inflation today is more difficult for the Fed to control with interest rate hikes because there are other factors at play. Supply chain backlogs and a hot labor market are bolstering inflation at 6.4% despite the Fed having raised interest rates to a range of 4.35% and 4.5%—the highest in 15 years.

Higher interest rates are meant to curb demand and slow economic activity, but it has little impact on the supply chain and labor market, both of which play a large role in the high prices we see today. Inflation has cooled slightly in recent months but sits well above the Fed's target rate of 2%.

The full effect of interest rate hikes won't be visible in the economy for at least 12 to 18 months, according to Marketplace. "When kids get amoxicillin for an infection, there's still that first 12 to 24 hours where they still feel miserable, and there's not much you can do about it," Julie Smith, economist at Lafayette College in Pennsylvania, told the news outlet.

Because it takes so long to see the true impact of interest rate hikes, it increases the likelihood of the Fed accidentally pushing the economy into a recession by slowing economic activity too much. A new research paper suggests the outcome of a recession is likely. "The researchers reviewed 16 episodes since 1950 when a central bank like the Fed raised the cost of borrowing to fight inflation, in the United States, Canada, Germany and the United Kingdom," per ABC News. "In each case, a recession resulted." 

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Wednesday, 21 February 2024

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