Welcome to Brainstuff, a production of iHeart Radio, Hey brain Stuff Lauren Vogelbaum. Here. The Federal Reserve raised interest rates by point seven five percentage points on July. It was the fourth interest rate hike in just five months, and a duplicate of the rays they made in mid June. It came at the conclusion of their July Monetary policymaking meeting.
They made the decision in order to attempt to relieve historic inflation, and officials indicate that they will be raising interest rates again in September by either point five or point seven five percentage points. But what did these back to back to back increases mean for the average American who has a credit card, mortgage, or bank account. First, let's discuss the Federal Reserve System, also called the FED. The FED is the central bank of the United States.
It's made up of three bodies. Is the Federal Reserve Board of Governors. This is the governing body of the Federal Reserve System. It oversees the operations of the Fed's second body, which are the twelve regional Federal Reserve Banks which hold federal funds. The third is the Federal Open Market Committee, which sets national monetary policies. Working together, these three bodies of the FED are responsible for the operation
of the U S economy. Its goals are ostensibly to oversee the U S monetary policy to promote employment, stable prices, and reasonable long term interest rates. To stabilize the US financial system, to minimize systemic risks in the US and abroad. To promote dependable individual financial institutions and monitor their impact on the entire US financial system. To foster payment system safety and efficiency to the banking industry and the US government.
And to support consumer protection via research and analysis, community economic development activities, and administration of consumer laws and regulations. The Federal Reserve is not funded by Congress. Instead, it's funded by the interest earned on securities it buys of plus fees it receives for services that it provides to banking institutions, including check clearing and fund transferring. All net earnings on the Federal Reserve banks are transferred to the
US Treasury. Okay, but what does all of this have to do with raising interest rates? The Federal Reserve uses interest rates to fight inflation, which is currently at a forty year high. As part of its mandate, the FED is obligated to maximize employment and keep prices stable. When the economy and job market are both strong, as they are now, the FED can focus on reducing inflation. Inflation is when prices increase, a meaning that the value of
a dollar decreases. You're not getting the same bang for your buck, and that the squeeze that we're feeling now. Federal Reserve Chairman Jerome Powell explained in a press statement on July, the Fed's monetary policy actions are guided by our mandate to promote maximum employment and stable prices for
the American people. My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those at least able to meet the higher costs of essentials like food, housing, and transportation. We are highly attentive to the risks high inflation poses to both sides of our mandate, and we are strongly committed to returning inflation to our two percent objective. One of the primary ways that the FED attempts to
curb inflation is by raising short term interest rates. The idea here is that raising short term interest rates increases borrowing costs for banks. They pass those costs onto consumers and businesses in the form of higher rates on long term loans. That essentially makes every being more expensive. But that's the goal to reduce consumer demand, which has overwhelmed supply and thus driven prices up. Higher rates will make it more expensive for consumers to have credit cards, student loans,
or home or car loans. The problem is inflation is currently so high that reducing it could require the highest interest rates in decades, which could weaken the economy. So is this all bad news in the short term? Perhaps, and the FED is trying to slow inflation without causing
recession at what's known as a soft landing. But many of the factors driving current inflation are beyond the fed's control, including things like the surge and crude oil prices and other commodities resulting from Russia's invasion of Ukraine, as well as pandemic related lockdowns in China, which exacerbated supply chain disruptions. The Powell said in another press statement on June, our objective really is to bring inflation down to two percent
while the labor market remains strong. I think that what's becoming more clear is that many factors that we don't control are going to play a very significant role in deciding whether that's possible or not. Inflation is soaring globally, not just in the US. So far in at least forty five countries have raised interest rates to help combat it,
including Brazil, Saudi Arabia, Switzerland, and England. The European Central Bank announced on June nine that it would also raise its key interest rates by twenty five basis points at its July meeting. If the FED can achieve a soft landing and reduce inflation without a recession, that would be good news for everyone in the long term. Powell remains hopeful, he said on July quote, We're trying to do just the right amount or I'm not trying to have a recession,
and we don't think we have to. We think that there's a path for us to be able to bring inflation down while sustaining a strong labor market. Today's episode is based on the article why does the FED change the interest rate? On house toff works dot com, written by Sarah BlimE. Brain Stuff is production of I Heart Radio in partnership with how stuff works dot Com, and
it's produced by Tyler Clang. Four more podcasts from My Heart radio, visit the heart radio app, Apple podcasts, or wherever you listen to your favorite shows.