Federal interest rate increases by 0.75 percent
Kelsey Quint | Friday, September 30, 2022
During their meetings on Sept. 20-21, the Federal Open Markets Committee (FOMC), a branch of the Federal Reserve System (Fed), raised the target range for the federal funds rate by 0.75 percentage points to a range of 3.00% to 3.25%.
This current rate marks the highest interest rates since the recession of 2008. Susan Collins, president of the Federal Reserve Bank of Boston, discussed the goals of the Fed in a public speech on Monday, Sept. 26th.
“I do believe the goal of a more modest slowdown, while challenging, is achievable,” Collins said.
However, the Fed recognizes the enormous risks at play.
“A significant economic or geopolitical event could push our economy into a recession as policy tightens further,” Collins said.
But just how close is a recession? Professor Margaret Forster of the finance department explained the causes behind the current economic state.
“The world has had low interest rates for a long time, basically since the crisis of 2007 and 2008. We have been living in a relatively low interest rate mode,” Forster said. “People have gotten used to being able to borrow at a lower rate.”
But then the pandemic hit in March of 2020. In response, governments all over the world lowered interest rates until they were teetering on zero. At the same time, handouts increased the amount of money in circulation. Forster described how this has produced serious side effects for today’s economy.
“People started to have cash to spend as the COVID situation stabilized,” Forster said. “But there were what the Fed called supply chain problems.”
China supplied a large portion of U.S. goods pre-pandemic. But even now, China continues to be affected by COVID lockdowns, which has decreased their production.
“So we have a lot of people in the U.S., and to a certain degree in Europe, with a lot of cash and fewer goods arriving due to the supply chains,” Forster said. “So the first thing that happens is we start having prices going up, which is inflation, and we hadn’t seen that for a long time.”
The second wave of economic disruption came when Russia invaded Ukraine in February, which posed a problem in terms of energy for western Europe.
For the United States, the lingering issue was inflation, which Forster said is a difficult one.
“Inflation is not good for anybody. I grew up with it,” she said. “Inflation just makes it harder for people to save and for companies to make the right decisions. So we do want inflation to come down.”
The Fed responded as they normally would — attempting to “soak up money” by raising interest rates. But that does not come without consequences and risks.
“Well now people are not going to invest in stocks … [They] are more interested in putting money in a safer place that gets a higher return,” Forster said. “If the Fed raises interest rates too high, too fast, then people really won’t want to spend anymore. And we could go into a recession. But the Fed is going to be aggressive and we’re going to keep raising that interest rate until this inflation is dead.”
Forster called it a “vicious cycle,” as when people lower their buying, companies will lose money, and at the same time lose investors as people are drawn to saving in a high-interest rate world.
But how will this impact students? Forster offered a sliver of hope for a niche group of students in the short term: those studying abroad and those who will next semester.
“The safest place right now is still the U.S. dollar,” Forster explains. “In the short run, it’s cheaper for those who are abroad and who are going abroad next semester. The dollar is strong. So, if you’re going to go to, say, London, this is a short-lived bonus. It will be cheaper for you to buy stuff and spend money in Europe. But that doesn’t mean that it’s a good thing for the world in the long run.”
For students in the U.S., the situation is different. The high interest rates take a toll on loans and investments.
For the current first-year class at Notre Dame, approximately 11% took out private, or other non-federal, student loans. Those are now more expensive.
“If you were thinking that you are going to have to borrow more money next year, you may want to revise that,” Forster recommended.
And as for those investment-savvy students looking to make a quick profit, Forster also advises against that gamble.
“I would not anticipate that anyone who has cash would not be buying on dips in the stock market. Only if you have a very long-term investment horizon,” Forster said. “For those students who are thinking, ‘Oh, I just got some free money, let me buy that cheap stock, it’s just like trading, right?’ No, right now it is only for the professionals. And even then, I’m not sure how well they’re doing.”
So what’s the bottom line? Forster said that she — and everyone else — does not truly know what is going to happen.
“This is very real … These are times to watch, these [are] times to be cautious,” she said. “What’s going on is serious. This is not just a little mini-crash that is going to be over in a month. There’s some, I think, fundamental things going on, and it’s changing the way that the world is operating.”
Contact Kelsey Quint at [email protected].