For all the hoopla over each Federal Reserve meeting, the thing that matters to the economy, funnily enough, isn't the level they set interest rates to exactly, but rather where rates are compared with inflation and the economy's"neutral" level of policy.
The first comparison is one that we can make directly. The whole reason the economy got out of whack during Covid wasn't just because the Fed took rates to zero; it was because they took rates to zeroThat meant in"real" terms, interest rates weren't zero; they were sharply negative,Think about it: if you can borrow money at zero, and your sales are growing 9-10% thanks to high inflation and a bit of real growth, that's a pretty juicy opportunity--a no-brainer, really.
The exact opposite is happening now. The Fed has jacked rates up to nearly 5.5%, but inflation has collapsed to just 3.2%. Now, as a business owner, if you have to borrow at let's say 6% but your top-line is only growing 3-4%, you're in a pickle. So the start-up boom is sharply reversing. U.S. bankruptcy filings this year have hit their
. And that's just for the largest corporations, which have the most financing options, so you can imagine its worse for smaller businesses.So the Fed isn't just raising rates; it's raising rates on steroids right now, because each successive month that the inflation rate stays as far below their target rate as it is right now--more than two points, meaning--that's actually a super restrictive monetary policy.
be, but this is a bit of economic artistry that is hotly contested, and very difficult to know for sure in real time. The reason it's come up again is that analysts are confused as to why the economy hasn't been weaker yet in the face of all of this Fed tightening. So they posit that