Federal Funds Effective Rate Source: Federal Reserve Economic Database
It’s all about inflation when it comes to the Federal Reserve increasing interest rates. Certainly since 2020, there are factors that the Federal Reserve cannot control that have played a significant role in contributing to inflation, such as the war in Ukraine, supply chain issues, and avian flu. However, the Federal Reserve can influence the overall level of demand in the economy through strongly influencing interest rates. The primary tool that the Federal Reserve has to combat inflation is through increasing the fed funds rate, which in turn increases borrowing costs and lowers consumer and business demand. Central banks around the world, including the United States, Europe, the United Kingdom, and Canada, have all raised interest rates to combat inflation. In March, the Federal Reserve projected the fed funds rate to be 5.1% at the end of 2023, signaling that the rate increases of the first quarter were not expected to be the last for the year. The Federal Reserve projected rate decreases in 2024, with the fed funds rate declining to 4.1% by the end of 2024. Of course, the rate projections are subject to changing economic conditions. Employment and The Job Market Although interest rates have been rising and uncertainty persists regarding economic growth, the job market has remained strong. The table below shows the monthly change in total nonfarm employment since 2020. In 2020, the onslaught of COVID caused total employment to decrease by over 20 million in April 2020. Employment growth rapidly increased with the economic rebound beginning in May, but by the end of the year the economic rebound had slowed. Job gains were reduced each month beginning in September, with job losses occurring in December. However, job growth returned in January 2021, and employment gains were recorded in every month between January 2021 and March 2023.
Monthly Change in Employment, All Employees (in thousands) (Source: Bureau of Labor Statistics)
Year
Jan Feb Mar
Apr
May
Jun
Jul
Aug Sep Oct
Nov
Dec
2020 2021 2022 2023
334 273 -1427 -20514 2625 4565 1444 1735 961 719 264 -268 494 575 784 286 482 693 769 663 557 781 614 569 364 904 414 254 364 370 568 352 350 324 290 239
472 326(P) 236(P)
P : preliminary
6
Center for Business and Economic Insight
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