December 16, 2021
The risk of higher inflation becoming entrenched has increased … And I think that’s part of the reason behind our move today.Fed chairman Jerome Powell after announcing the Federal Reserve plans to scale back some of its policies due to inflation.
- The Federal Reserve held a two-day meeting this week – it meets regularly to discuss monetary policy (interest rates and how much money is in circulation).
- The Fed (aka “the central bank”) communicated a change concerning two of its actions used previously to support the economy – buying bonds and keeping interest rates low.
- The reason? Inflation: “That feels terrible for everyone. Even though wages are increasing, inflation is outpacing wage growth. So that’s eating into everyone’s living standards.” Megan Greene, a senior fellow at Harvard’s Kennedy School of Government.
- Why It Matters: The Fed controls the federal fund rate – which impacts mortgage rates, car loans, credit card interest rates, etc. – and in recent years has kept that rate historically low so that it’s been very inexpensive to borrow. The Fed’s recent comments suggest the era of easy, cheap borrowing rates may be changing due to concerns about inflation.
by Jenna Lee,