Captain Powell applied the brakes yesterday when the Fed raised rates 0.75% (or 75 basis points) yesterday.
What does that mean, and should you care?
The Fed’s mandate is to 1) keep people employed and 2) keep inflation in check.
They do that largely by raising or lowering interest rates.
If they raise rates, they cool down the economy. Overheated economies get too far over their skis (like now), which leads to recessions.
If they lower rates, they heat up the economy. Cold economies (aka recessions) need a little kindling.
But moving the economy is like turning a giant a cruise ship – slow.
The effects don’t trickle through the economy for 12-18 months.
So we won’t know if the Fed raised rates enough this week for a while.
What does that mean for you?
The bad news is mortgages will be more expensive. Whomp whomp.
The good news is that the housing market will cool off AND you’ll earn more interest in your emergency fund and bond portfolio! Woohoo!
Monetary vs. Fiscal Policy
Fiscal policy is set by Congress and the President.
That’s mostly raising or lowering taxes, adding incentives or just outright giving people money.
But these are nothing more than the deck crew helping to dock the ship (aka economy).
Monetary policy – raising and lowering rates and buying or selling government bonds – is like the captain steering, braking and accelerating the ship.
In Captain Jerome, we trust.
