There is lots in the news these days about the actions of the Federal Reserve (the Fed). It’s pretty clear that they have some important role in controlling inflation and interest rates. So what exactly is The Fed, what do they do, and why?
Interest Rate
I’ve been watching the Fed raise interest rates while the size of the national debt keeps rising. The dangerously high national debt is so high now that the annual debt payment is itself dangerously high. Interest expense may soon be the biggest annual federal expenditure. At the same time, inflation is still too high and the Fed won’t reduce interest rates until inflation is back to the Fed’s 2% target. Interest rates can’t come back down until inflation is slain, but interest rates have to come back down to save the national budget. It sounds like an impossible quandary.
The Fed has a mandate to control prices, and based on that they should raise and hold interest rates high until inflation is back to its target of 2%. The stock market is generally priced as though nothing too bad will happen if interest rates are high temporarily and that inflation and interest rates are going to drop soon. But there are reasons to wonder how high rates will get and what damage it will cause.
Lots of people are speculating whether we’re headed for a recession. John Hussman notes that historically recessions are not officially called until long after they happen. That means we won’t know until way after the fact when or if a recession happens. We could already be in the beginning of a recession, or we might not have one at all, we won’t know for sure until later.