Fueling Economic Fire
The Federal Reserve is experiencing a challenge due to the rising interest rates and oil prices. There has been a rise in Treasury yields leading to higher costs for consumers and businesses, unrest in the stock market, and difficulties managing inflation without causing a recession.
The average price of gasoline in the United States has approached the worrisome $4-a-gallon mark as oil prices have resumed an upward surge, reaching over $95 per barrel. In addition, the strong dollar is depressing foreign earnings for U.S. companies, adding to the economy's challenges.
There is a discrepancy faced by the Federal Reserve between the short-term interest rates, controlled by the Fed, and the long-term rates, set by the bond market. Bond markets have signaled a possible recession since November 2022 by inverting the yield curve, where long-term rates are lower than those set by the Federal Reserve. Despite the Fed's efforts to control inflation by raising interest rates, inflation remains high, and a potential recession looms.
Interest rates have increased, making consumer loans more expensive and limiting consumer spending. Because interest rates and bond prices are inversely related, long-term bond investors have suffered losses. ETFs such as the iShares 20+ Treasury Bond have been affected significantly, with the iShares 20+ Treasury Bond exchange-traded fund in particular experiencing a notable drop.
Stock investors also face a challenging situation since they hoped inflation would be controlled by the Fed and that tightening would end soon. The unsettled economic environment and market conditions point to further turmoil, with factors outside of the Federal Reserve's control impacting the economy and markets.
Reference:
Sommer, Jeff. September 29, 2023. Why High Interest Rates and Energy Prices Are Stressing the Economy. The New York Times.
I agree with this as being unsettling and am worried that inflation will not come down to our goal before there is a recession. As we know we have a supply issue which is causing the increases in prices and with everything going on with China and getting imported goods. I do not see things taking a turn any time soon. I'm curios what the government or the Fed will do if our interest rates don't succeed in slowing the economy down and reducing inflation.
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