Interest Rates Theoretically, the Federal Reserve acts in an independent manner to balance economic growth with inflation. The Federal Reserve tries to accomplish this goal through targeting the “fed funds rate” – a very short-term interest rate that when changed, typically has a rippling effect through the financial markets. The Federal Reserve influences this rate by primarily controlling the money supply in the United States. The amount of money circulating in the economy has an impact on interest rates and credit conditions - more money, lower interest rates; less money, higher interest rates. The federal funds rate is increased when the Federal Reserve decreases the money supply by selling Treasury securities (technically called Open Market Operations). After a series of seven interest rate cuts, the Federal Reserve brought the fed funds rate to a then record low of 0.00-0.25% in 2008 to help the economy rebound from the financial and economic crisis. The record low fed funds rate remained until 2015, when the Federal Reserve began slowly raising interest rates due to concerns that the economy would overheat with unemployment approaching 5.0% in late 2015. The chart below shows the federal funds rate since 2017. Seven interest rate increases occurred in 2017 and 2018 to temper potential inflationary pressures resulting from continued economic growth, the tax cuts of 2018, and the unemployment rate dropping below 4.0%. The fed funds rate started 2017 at 0.50-0.75%; by the end of 2018, the Federal Reserve had increased the rate to 2.25-2.50%. The Federal Reserve reversed policy in 2019 with three interest rate cuts primarily due to concerns over an economic slowdown resulting from trade wars and tariffs. In 2018 and 2019, the U.S. initiated a wave of tariffs between the U.S. and several countries. Although the main focus was on China, tariffs were also placed on goods from several countries, including Canada, Mexico, India, South Korea, and the European Union. According to the Congressional Budget Office , by January 2020 the United States had imposed tariffs on 16.8 percent of goods imported into the country. In response to the tariffs, U.S. trading partners retaliated by imposing their own trade barriers. As of early 2020, retaliatory tariffs had been imposed on 9.3 percent of all goods exported by the United States, which consisted primarily of industrial supplies and materials as well as agricultural products. U.S. tariff rates peaked in 2019. The weighted mean applied tariff is the average of effectively applied rates weighted by the product import shares corresponding to each partner country. According to the World Bank , the U.S. mean applied tariff rate increased from 1.59% in 2018 to 13.78% in 2019 before declining to 1.52% in 2020. Federal Reserve policy in 2020 was driven by the expected devastating impact of COVID on the economy. Two interest rate cuts in March returned the fed funds rate to its historical low of 0.00-0.25%. The Federal Reserve kept the fed funds rate at its historical low that, when combined with fiscal policy, helped spur an economic rebound. In 2022 the focus of the Federal Reserve, and central banks around the world, shifted to increasing interest rates to fight inflation. In March 2022, the Federal Reserve began the upward trek for interest rates, with eleven rate increases occurring through November 2023. The objective of the rate increases was to lower consumer and business spending, which in turn would lower inflation through reduced demand for products and services. Although global factors outside the control of central banks were the primary drivers of recent inflation, the Federal Reserve and other central banks focused on lowering inflation through reduced demand for products and services. In September 2023, the European Central Bank raised interest rates by a quarter of a percentage point to 4%, the highest level ever since the launch of the euro currency in 1999. The European Central Bank raised interest rates at ten consecutive meetings before pausing in October 2023. The Canadian central bank gradually raised its policy interest rate from 1.5% in June 2022 to 5.0% in July 2023 before pausing interest rate hikes. The Bank of England began raising its bank rate from 0.10% in November 2022 to 5.25% in August 2023 before ending rate hikes. Australia’s central bank gradually raised interest rates from 0.10% in April 2022 to 4.35% in December 2023. Inflation was a global problem; central banks around the world raised interest rates to decrease interest rate sensitive consumer and business spending. An exception to rising interest rates has been China, which has reduced interest rates to counter sluggish economic growth. Although global inflation has generally remained above desired levels, the potential for interest rate cuts remains in 2024. The CME FedWatch Tool provides insight as to what the financial markets expect for interest rates based on
Central Wisconsin Report - Spring 2024
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