January 31, 2023
The Federal Reserve is set to raise interest rates again tomorrow.
And yeah – those rates may feel high but the truth is – for about the last 15 years you’ve just become used to being able to borrow money really cheaply. Today’s interest rates are nowhere near the highs we’ve seen in the recent past. And I’m going to explain the facts and numbers in a second but first…
Raising the interest rates is the main tool the Federal Reserve has to get inflation under control. In case you don’t know the fed is an independent body and does not answer to congress or the president. As I’ve reported in multiple videos, inflation happens when there’s too much money in circulation. By raising the interest rates, it makes money more expensive to borrow and that causes people to pull their money out of circulation, slow down the economy and eventually getting prices down. On the flip side, when the economy is sluggish, The Fed cuts interest rates, making money really, really cheap to borrow which encourages people to spend.
This is the graph showing how the federal reserve has raised and cut interest rates since the 1950s. I’m going to explain that huge spike in a second. But first I want to talk about the recent past.
As we came out of the 2008 and 2009 recession you can see interest rates were almost at zero for more than seven years. That makes sense – if you were alive you remember the recession and the housing crash so the federal reserve kept rates at almost zero to encourage Americans to spend to get the economy up and running again.
But right here January of 2016 you can see the interest rates started to go back up slightly. Until 2020 when the pandemic hit and the world shut down. Interest rates cratered again. The supply chain broke down, people weren’t spending but then the world started to open back up, congress gave people stimulus checks, people had money to spend and no goods to spend it on. That drove up inflation. And forced the fed to dramatically increase in interest rates. And that’s how we got to today. This sharp increase in interest rates has brought inflation down in the last few months. Yeah it’s still high at 6.5%, but it’s down a lot since June when it peaked at 9.1%.
But the interest rates we see today about 4.1% is nowhere near what we saw even in 2007 when it was 5.25% or even in 1989 when it was 9.84%. But by far the highest rate we saw was when our parents or grandparents were buying houses in the 1980s when the interest rate was – wait for it – almost 20%!!!
How did we get there? Runaway inflation caused by the oil crisis of that time, government overspending and higher wages for workers leading to higher prices. Sound familiar?
Look at the Federal Reserve interest rate chart here.
