The Fed’s Inflation Focus: Why Does Federal Reserve Care So Much About Inflation?

Why Does the Federal Reserve Care So Much About Inflation: The Federal Reserve is responsible for overseeing monetary policy and promoting economic stability. The Fed believes that 2% inflation is optimal for a robust economy and would like to see prices return to this level.

There is a reason why taking out a personal loan or using a credit card balance now costs more money. Since early 2022, the Federal Reserve has been increasing interest rates to combat inflation. Consequently, the cost of financing has increased.

But why does the Federal Reserve care so much about inflation? And why is it willing to potentially trigger a recession in order to reduce inflation?

Why Does the Federal Reserve Care So Much About Inflation: There are honourable intentions at work.

The Federal Reserve is responsible for controlling monetary policy in the United States and fostering a prosperous, stable economy. And the Fed strongly believes that 2% inflation is most conducive to achieving this objective.

At 2% inflation, the Federal Reserve believes consumers can confidently spend. The central bank also believes that 2% inflation contributes to robust employment levels.

In April, annual inflation was measured at 4.9%, according to the Consumer Price Index for that month. Clearly, we are not where the Fed would like us to be in terms of inflation. This is why the Fed has been so adamant about increasing interest rates.

It’s not as if the Federal Reserve wishes to punish consumers by increasing the cost of borrowing. And the Fed’s objective is not to ignite a recession and increase unemployment rates.

Rather, the Fed is adamant that 2% inflation is the optimal long-term target. Therefore, it is making every effort to get us back there.

Let us not forget that due to rampant inflation, many Americans are currently struggling to pay their basic expenses. Some are having difficulty making their mortgage payments on time. Others have difficulty placing food on the table. Numerous individuals could be relieved of this tension by a decline in inflation.

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Will an increase in interest rates cause a recession?

Unfortunately, this possibility exists. If consumers grow weary of sky-high interest rates, they may reduce their expenditures until borrowing costs decline. If consumer expenditure declines significantly, it could be sufficient to trigger a recession.

Obviously, the Fed hopes that consumers will reduce their spending just enough to reduce inflation, but not enough to trigger a recession. It remains to be seen whether this will occur.

To be explicit, however, not every economic recession is excruciatingly painful and protracted. There is such a thing as a mild recession, and the Fed is advising American consumers to anticipate one in the near future.

Now, this does not imply that a mild recession will not result in an increase in unemployment and other unfavourable outcomes. However, it is fair to say that consumers have been adequately warned at this juncture.

Increasing your savings account balance is a prudent action to take at this time. Regarding rate increases, we do not know what the Fed’s policy will be for the remainder of 2023. But if the Fed decides to raise rates again this year, it could bring us closer to an undesirable economic decline.

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