Instead, the ongoing pandemic and Russian war in Ukraine continue to disrupt supply chains that are driving price increases. At the same time, energy and grocery companies are effectively price gouging customers by raising prices at higher rates than their costs are growing. These companies are using the macro environment as an excuse to take in record profits.
The Federal Reserve, whose job is to control inflation, can do nothing about either of the issues at the heart of the problem. Instead, the central bank is falling back on the only tool in its toolbag: raising interest rates. Between March and September of this year, the Federal Reserve increased rates five times, bringing the Federal Funds Rate (the rate that commercial banks lend to each other) from 0.25% to 3%.
Source: Yahoo Finance YouTube
On November 2nd, the sixth raise of 2022 was announced. The 75 basis points raise, the fourth consecutive so-called “jumbo” raise, brought the Federal Funds Rate to 3.75%. The six raises are the most in a calendar year since 2005 when the Federal Reserve raised rates eight separate times. However, these were all 25 basis point raises, so the federal funds rate only went up 200 basis points total; in 2022, we’ve seen a 300 basis point increase.
These repeated raises have an increasing number of economists worried that they could plunge us into a recession. Whether a recession comes to pass is still up in the air, but the Federal Reserve has indicated they will continue increasing rates until inflation falls to their preferred 2% level.