In March and in May the Fed raised rates .25 and .50 bps respectively. After the June 14-15 meeting they are expected to raise rates another .50 bps in an effort to curb the historic inflation numbers we are seeing.

Inflation is hurting our economy and the people that make up our economy. The Fed exists to limit the damage done by inflation.

How Does the Fed Work?

The Federal Reserve has what’s commonly known as a “dual mandate” to keep inflation/prices reasonable and to keep unemployment from getting out of hand.

The Fed has many tools they can utilize to fulfill this mandate:

• Open Market Operations
• Discount Window and Discount Rate
• Reserve Requirements
• Interest on Reserve Balances
• Overnight Reverse Repurchase Agreement Facility
• Term Deposit Facility
• Central Bank Liquidity Swaps
• Foreign and International Monetary Authorities (FIMA) Repo Facility
• Standing Overnight Repurchase Agreement Facility
• Expired Policy Tools

What everyone is looking at right now is the Fed’s Open Market Operations process. This is the method they use to impact the rate we’re all talking about all of the time. There’s a 12 person committee called the Federal Open Market Committee (FOMC) that sets the targeted rate and then uses open market operations, discount rates, and reserve requirements to impact it.

What The FOMC Has Done So Far

In May, 2022 rates were raised by another 50 basis points for a targeted level of .75-1.00. It’s expected that in June they’ll move up another 50 basis points for a targeted level of 1.25 to 1.50.

2022

The idea is that this rate hike will help keep the economy from “overheating” with inflation rising quickly.

Will it work?

Historically it has, but so far the rate of inflation is far outpacing the fed’s response. Here’s what inflation vs. the fed funds rate has looked like lately:

Looks a little bit behind the curve doesn’t it? It’s even worse now that CPI rates came out at a staggering 8.6% for May 2022.

Contrast that image with what Fed Chair Paul Volcker did in the late 70’s and early 80’s to battle rising inflation:

Fed funds rates got up to 20% there in the early 80s to tamp down the extreme inflation that was taking place.

I don’t know why the Fed is being so dovish (I have my guesses) but this is a pretty concerning signal that we need to buckle up and be prepared for some less-than-ideal times as far as personal finance goes. Here are some action items you can start thinking about right now to be prepared:

• Pay off high interest debt
• Lock in long term low mortgage rates
• Pay off variable interest debt
• Put excess cash to use by investing it

Stocks are historically a great hedge against inflation and owning a home (with a low mortgage rate) is a great hedge also. Even better than that is being completely debt free and having the bulk of your money working for you in the form of investments, business, or real estate.

Don’t Panic

Above everything it’s important to not fear. Romans 8:28 says that “We know that all things work together for the good of those who love God: those who are called according to His purpose.” There have been worse times in history than this and they haven’t yet ushered in the apocalypse.

Remember that all we have belongs ultimately to the Lord and we are but stewards: “The earth and everything in it, the world and its inhabitants, belong to the LORD” Psalm 24:1.

We must remain steadfast and use the tools we have been given to make the best decisions we can without fear and without envy and greed.