In an economy it is known that wages and inflation are very much considered to be one as when one goes up then the other follows. The economy must work this way because otherwise labor would look for work elsewhere if they were not given a raise when their expenses have gone up. The turnover rate would shoot through the roof. Right now the federal reserve is doing what they can to slow down the rate of inflation. Current inflation rates are about 8.2% and is up about 5.1% from last year, keep in mind that Jerome Powells goal is 2% inflation throughout the year and we are 4 times above that goal. With that being said it is unanimous that the federal reserve will yet again raise interest rates another .75 percentage points at their next meeting in the first week of November. They do this in hopes to combat the high inflation rates so there will be a cooldown for demand in the market as demand is what is causing this inflation. However, this is not the only issue in the economy. It has not been publicly confirmed however by the definition of what a recession means then we have just gotten through one as Q1 and Q2 GDP saw a decline. This is an issue due to the fact that when trying to combat a recession you would like to see consumer spending increase which would increase GDP, but currently demand is too high. The federal reserve raising interest rates will cause a decrease in consumer spending, and business investment and will see an overall increase in savings. This will likely lower GDP, and bring us back to that recession level that we were technically in during Q2.
So how does the federal reserve go about this? They would like to decrease demand by raising interest rates but in doing so will decrease GDP and bring us back to the same spot we were before in Q2. Well unfortunately there is really no right answer. The federal reserve is going to have to do what they have to do in order to combat the main target which is inflation and it is likely we will not see the effects of these higher interest rates until further down the road when demand has finally cooled off, lowering inflation rates and when wages have followed that same trend. We must also note that the market is currently down along with stocks and when interest rates rise then we see a decrease in demand for stocks and index's but an increase in demand for bonds. Yet another reason why saving rates will continue to rise and consumer spending will decrease, ultimately putting ourselves back into the recession that we have been trying to get out of.
https://www.nytimes.com/2022/10/28/business/fedeal-reserve-inflation-wages.html
It is certainly a troubling time for America's economy and in turn for other countries economies. Hopefully as interest rates continue to rise the inflation rates will decrease. For now it looks like Americans just need to strap in for a bumpy ride.
ReplyDeleteIt has been interesting to observe what the Fed has been doing in response to the continuing issue of inflation. I worry that as inflation has been growing at a faster rate than wages that as you mentioned, we will see some negative effects in the near future.
ReplyDeleteIn the past few months, inflation is at the highest it has been since 2020. There has been a lot of concerns voiced about the rise of inflation and what it could mean for the economy. As you mentioned, the Federal Reserve is planning on raising interest rates to curb inflation, but if they raise it to much it could cause a decline in GDP. How the economy responds to the raise in interest rates will be telling on the possibility of an upcoming recession.
ReplyDeleteInflation has caused some chaos in the American economy over the past few months. The Fed seems to be slightly between a rock and a hard place in regards for what to do. The Fed will have to decide what is more important and maybe sacrifice some growth in order to keep balance in the economy.
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