The video discusses the recent actions of the Federal Reserve in its attempt to combat inflation by raising interest rates and then subsequently lowering them. Inflation had surged significantly post-pandemic, going beyond the central bank's target of around 2%. In efforts to bring it down, the Fed increased the Benchmark interest rate eleven times over a span of 16 months, but has decided now to decrease it by half a percentage point, given the need to stimulate the economy without exacerbating unemployment.

The Fed's current challenge is to maintain a balance as inflation abates but unemployment figures show alarming trends that warn of a potential Recession. The cooling job market indicates businesses are requiring fewer workers, adding complexity to the economic landscape. The central bank, hence, finds itself in a situation to adjust the federal funds rate carefully to stimulate investment and hiring without reigniting inflation.

Main takeaways from the video:

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Key Vocabularies and Common Phrases:

1. Benchmark [ˈbɛn(t)ʃmɑːrk] - (n.) A standard or point of reference against which things may be compared.

The Federal Reserve has been climbing a mountain to combat stubborn inflation so fast that it raised its Benchmark interest rate eleven times in 16 months.

2. Inflation [ɪnˈfleɪʃ(ə)n] - (n.) The rate at which the general level of prices for goods and services is rising.

The central bank likes to keep inflation around 2%.

3. Recession [rɪˈsɛʃ(ə)n] - (n.) A period of temporary economic decline during which trade and industrial activity are reduced.

While prices have cooled, an Uptick in unemployment has reignited warnings of a Recession.

4. Stimulate [ˈstɪmjʊleɪt] - (v.) To encourage or promote the development of (something).

The Fed can cut interest rates for two reasons. One would be you're actually trying to stimulate the economy.

5. Unemployment [ˌʌnɪmˈplɔɪmənt] - (n.) The state of being without work while actively searching for it.

Economists have turned their attention toward troubling signs in the labor market.

6. Erosion [ɪˈrəʊʒ(ə)n] - (n.) The gradual destruction or diminution of something.

The Fed can try to avoid further Erosion by cutting the federal funds rate.

7. Incentive [ɪnˈsɛntɪv] - (n.) A factor that motivates or encourages a person to do something.

They can also create an Incentive for businesses to invest in expansion and hiring.

8. Sustainable [səˈsteɪnəbl] - (adj.) Able to be maintained at a certain rate or level.

It has to be sustainable. The danger is that if the labor market starts to weaken a little bit more...

9. Mandate [ˈmændeɪt] - (n.) An official order or commission to do something.

We've got to keep our eye on the employment side of the mandate.

10. Destabilizing [diːˈsteɪbɪlaɪzɪŋ] - (adj.) Causing instability in a system or situation.

That would be very destabilizing to have interest rates go back up for the Fed to say, whoops...

Navigating Interest Rates in a Changing Economic Landscape

The Federal Reserve has been climbing a mountain to combat stubborn inflation so fast that it raised its Benchmark interest rate eleven times in 16 months, then left it unchanged for more than a year. But now the committee decided to lower the target range for the federal funds rate by a half percentage point. Now is a make or break moment for the Fed.

While prices have cooled, an Uptick in unemployment has reignited warnings of a Recession. Recession, a Recession. And so the question now is, can they stick the landing? The central bank likes to keep inflation around 2%. That became a problem in the aftermath of the pandemic. Prices grew well above the 2% mark, eventually Surpassing 7% in 2022.

For the last two years, inflation was the big emergency that was occupying all of the Fed's attention. When the Fed was raising interest rates, they thought the economy was going to have to slow down a lot more than it has. I wish there were a completely Painless way to restore price stability. There isn't, and this is the best we can do. And what's happened is the economy's done pretty well and inflation's come down anyway. By July, the Fed managed to bring inflation closer to 2.5%.

And with prices easing, economists have turned their attention toward troubling signs in the labor market. The US economy added 142,000 jobs in August, a slight rebound from the summer's slump in hiring, but a notable decline from a year ago. The cooling in labor market conditions is Unmistakable. It's harder to stop a rise in the unemployment rate once demand for workers has cooled.

I mean, what you're seeing right now is businesses saying we just don't need workers the way we did a couple of years ago. The Fed can try to avoid further Erosion by cutting the federal funds rate, or the rate that commercial banks pay when they borrow from each other. Those cuts, in turn, can lead to reduced rates on loans, meaning lower borrowing costs for consumers in the form of mortgages, car loans, and credit cards. They can also create an Incentive for businesses to invest in expansion and hiring.

The Fed can cut interest rates for two reasons. One would be you're actually trying to stimulate the economy. You could also cut interest rates, including in the current situation, just because they don't need to be as high as they've been. You don't need to slow down the economy as much as you had over the past year or two, when inflation was much higher.

Back to the mountain that the Fed spent the last two years climbing. Starting from historically low interest rates near zero in early 2022, the central bank eventually hiked to rates between 5.25% and 5.5% by July 2023, and stayed there. Now they're coming down the mountain, but nobody really knows where base camp is going to be. How far down are you going to go and how fast should you get there?

Fed officials have largely agreed on the path forward since June 2022. But in recent months, two routes down to base camp have emerged. Earlier this year, you heard a lot of people saying, look, this economy's doing all right. The economy's adding jobs. The unemployment rate is at a historically low level.

Why rush this? You have a Fed governor, Mickey Bowman, the Kansas City Fed president, Jeff Schmidt, saying, I still believe quite strongly that we really need to trend this inflation number towards two. It has to be sustainable. The danger is that if the labor market starts to weaken a little bit more, it could weaken a lot more, and then you're having to cut more aggressively. The other camp argues more aggressive rate cuts could preempt a serious decline in employment.

Now that you have the labor market slowing down, these people are saying, let's get ahead of this. Let's not have a Recession that isn't necessary to finish the job on inflation. There have been a number of Fed officials, the Fed governor Adriana Kugler, the Chicago Fed president, Austin Goolsbee, who have been more insistent in saying, we've got to keep our eye on the employment side of the mandate.

Now this is what the path down to 2% inflation looks like. The danger, of course, of going too fast is, well, what if some new shock hits the economy and inflation kicks back up? That would be very destabilizing to have interest rates go back up for the Fed to say, whoops, we cut too much. We need to start climbing this mountain again.

The Fed announced at its September meeting that it would cut rates by 50 basis points, starting on a faster path down the mountain. We thought about what to do and we concluded that this was the right thing for the economy, for the people that we serve. And that's a, that's how we made our decision.

A 50 basis point interest rate cut signals more urgency here. They raised rates a lot, and they raised rates in large increments on the way up. And so now that inflation seems like it's under control, but there are more risks of a bigger slowdown in the job market than they want. They're going to take back some of those interest rate cuts more rapidly, too.

I think you can take this as a sign of our commitment not to get behind. And so there will be big questions now around. Well, do you expect to do this again in November and in December and early next year? How fast do you think you're going to take back the interest rate increases that you made in 22 and 23?

As the Fed charts its way forward, a lot remains at stake for the economy and Powell in the months ahead. It would put Powell on the Mount Rushmore of central bankers if he can stick the landing. Is the economy just going through a soft patch, or is it falling into the Recession that has been long predicted by many economists? The next six months could be Pivotal to determining which of those we're seeing unfold here.

Economics, Politics, Finance, Monetary Policy, Federal Reserve, Interest Rates