{"id":40,"date":"2025-05-02T14:52:06","date_gmt":"2025-05-02T18:52:06","guid":{"rendered":"https:\/\/people.bsu.edu\/econbriefs\/?p=40"},"modified":"2025-05-22T10:38:23","modified_gmt":"2025-05-22T14:38:23","slug":"inflation-interest-rates-and-the-feds-next-move-by-dr-cecil-bohanon-and-dr-john-horowitz","status":"publish","type":"post","link":"https:\/\/people.bsu.edu\/econbriefs\/2025\/05\/02\/inflation-interest-rates-and-the-feds-next-move-by-dr-cecil-bohanon-and-dr-john-horowitz\/","title":{"rendered":"Inflation, Interest Rates, and the Fed\u2019s Next Move \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz"},"content":{"rendered":"<p><em>Originally written on 10\/10\/2023<\/em><\/p>\n<p><span data-contrast=\"auto\">Where is the U.S. economy going, and what should government do to ensure prosperity? A critical player is the Federal Reserve, whose primary job is maintaining a low and stable inflation rate. The Federal Reserve has more or less established a 2% long-run inflation target. In our opinion, it would be very unwise for the Fed to raise that target, and there is little evidence they intend to do so. So, how are they doing?<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">The primary way the Fed tries to maintain low and stable inflation is through the target rate they set for Fed Funds, which is the interest rate for overnight lending between U.S. banks. This provides a benchmark for other interest rates in the economy. Before the 2008 financial crisis, the Fed Funds rate was 5.25%. To forestall an economic depression during the 2008 financial crisis, the <\/span><a href=\"https:\/\/fred.stlouisfed.org\/series\/FEDFUNDS\"><span data-contrast=\"none\">Fed lowered the rate to near zero in 2008 and kept the rate below 2.5%<\/span><\/a><span data-contrast=\"auto\"> until September of last year. The fear that these ultra-low rates would trigger inflation did not materialize for over a decade.\u00a0 <\/span><a href=\"https:\/\/fred.stlouisfed.org\/series\/CPALTT01USM659N#0\"><span data-contrast=\"none\">From the fall of 2008 until the spring of 2021, the annual inflation rate never exceeded 4%. Inflation broke 4% in April 2021, then more than doubled, peaking at 9% in August 2022.<\/span><\/a><span data-contrast=\"auto\">\u00a0\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">The Fed started raising the Fed Funds rate in the Spring of 2022 to quell rising inflation and has stayed on that course since then. The Fed Funds rate today stands at 5.33%. Inflation has come down and hovers around 3%, well below its peak but not yet to the 2% target.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">To determine if the Fed should raise rates to lower inflation, we should look at what people expect inflation rates to be in the future. The difference between <\/span><a href=\"https:\/\/fred.stlouisfed.org\/series\/T5YIE\"><span data-contrast=\"none\">the interest yield on the regular 5-year U.S. Treasury and the inflation-indexed five-year U.S. Treasury bond is an indicator of what market participants expect inflation to be in the next five years.<\/span><\/a> <span data-contrast=\"auto\">This difference has been below 2.5% since March 2023 and has steadily declined. In October 2023, it was 2.14%. In addition, the yield <\/span><a href=\"https:\/\/fred.stlouisfed.org\/series\/DGS5\"><span data-contrast=\"none\">on the unindexed five-year U.S. Treasury is 4.8%&#8211;<\/span><\/a><span data-contrast=\"auto\"> the highest it has been since before the 2008 crisis.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Despite our tendency to be inflation hawks and our disdain for discretionary monetary policy, since people\u2019s expectations about inflation are about 2% and are falling, we think the Fed should keep rates where they are and not raise them.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Originally written on 10\/10\/2023 Where is the U.S. economy going, and what should government do to ensure prosperity? A critical player is the Federal Reserve, whose primary job is maintaining a low and stable inflation rate. The Federal Reserve has more or less established a 2% long-run inflation target. In our opinion, it would be [&hellip;]<\/p>\n","protected":false},"author":112,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8],"tags":[398,98,396,4,55,7,269,397,399,97,114,395,400,401],"class_list":["post-40","post","type-post","status-publish","format-standard","hentry","category-inflation","tag-2008-financial-crisis","tag-fed","tag-fed-funds","tag-federal-reserve","tag-government","tag-inflation","tag-inflation-rate","tag-interest-rate","tag-interest-yield","tag-market","tag-monetary-policy","tag-u-s-economy","tag-u-s-treasury","tag-u-s-treasury-bond"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Inflation, Interest Rates, and the Fed\u2019s Next Move \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/people.bsu.edu\/econbriefs\/2025\/05\/02\/inflation-interest-rates-and-the-feds-next-move-by-dr-cecil-bohanon-and-dr-john-horowitz\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Inflation, Interest Rates, and the Fed\u2019s Next Move \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs\" \/>\n<meta property=\"og:description\" content=\"Originally written on 10\/10\/2023 Where is the U.S. economy going, and what should government do to ensure prosperity? 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