Interest Rates Going Lower

The Federal Reserve met in Jackson Hole, Wyoming last week to talk about monetary policy. They meet in Jackson Hole every year and it's always a highly anticipated event, and more so this year.

On Friday, Jerome Powell who is the Fed Chairman, spoke about the current status of the economy and how interest rates are expected to be changed moving forward. The last couple of years we have seen rates increase to historic levels.

How Does the Fed Control Inflation?

The Fed uses interest rates as a tool to control inflation. Here’s how it works:

1. Raising Interest Rates: When the Fed thinks inflation is too high, they might raise interest rates. This makes borrowing money more expensive for people and businesses.
2. Impact on Spending: Higher interest rates mean people are less likely to take out loans for things like cars or houses. Businesses also find it more expensive to borrow money for new projects. As a result, spending goes down.
3. Effect on Jobs: When businesses spend less, they might need fewer workers, which can lead to layoffs. However, the Fed doesn’t want to cause unemployment; they just want to slow down inflation.
4. Less Demand, Lower Prices: When people and businesses spend less, the demand for goods decreases. When demand goes down, prices can start to fall, which helps control inflation.
5. Adjusting Rates Again: If inflation comes down and the economy slows too much, the Fed might lower interest rates again. This encourages spending and helps businesses hire more workers.

The Fed's Goals

The Fed has two main goals: to keep prices stable (control inflation) and to promote maximum employment (make sure people have jobs). They try to balance these goals to keep the economy healthy. In summary, the Fed uses interest rates to influence spending and inflation, but their ultimate aim is to maintain a stable economy with both reasonable prices and good job opportunities.

In his speech yesterday, Powell made it clear that in his opinion the strategy has worked, and he feels confident that inflation is declining at a rate that is sustainable. Therefore, it is very likely that we will see interest rates cut next month.