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The Federal Reserve has raised interest rates in an effort to reduce inflation, which has reached a 40-year high.

Groceries, houses, cars, gas: where do high costs hit you the hardest? And why do interest rates continue to rise? This is how the Federal Reserve works.

TO SUM UP

  • The Fed raised interest rates in an effort to reduce inflation, which is at a 40-year high.
  • Higher rates mean consumers pay more interest on loans for major purchases like homes and cars.

  • Further rate hikes are expected this year.
  • Historically, economic recessions often follow Fed interest rate hikes.

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The Federal Reserve aka the Fed

THE BACKGROUND

  • The Federal Reserve is the central bank of the United States that manages the economy.

  • The Fed says it “conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.”
  • Forbes describes the Fed’s mission as such: “Keep the US economy going – not too hot, not too cold, but just right.”

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Trevor Noah on the Fed

WHAT IS HAPPENING

  • The Fed has already raised interest rates in 2022 – with more increases planned. The idea: Increase the cost of credit, discourage spending and reduce inflation.

  • Inflation was fueled by supply chain disruptions and soaring prices for gasoline, food and housing.

WHY IS IT IMPORTANT

  • With the Fed in inflation-fighting mode, some are worried about a possible recession.

  • Politico reports that “nine times since 1961 the central bank has embarked on a series of interest rate hikes to contain inflation. Eight times a recession followed.

  • According to Yahoo Finance, “It takes about three years from the first Fed hike to enter a recession, according to 70 years of data on rate hike cycles analyzed by Deutsche Bank.”

SOURCES

  • The Federal Reserve: About the Fed
  • Forbes: What happens when the Fed raises interest rates?
  • Fortune: 3 key differences between the volatility of 2022 and the Great Recession of 2008
  • Yahoo Finance: What 70 years of data reveals about the Federal Reserve driving recessions
  • Politics: 8/9. This is the Fed’s record on triggering a recession while trying to fix inflation.

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The sum

LEARN MORE IN THE SUM

The Sum breaks down complex economic issues and their impact on your life in minutes a day. Follow thesum.news on Instagram for the full story.

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