The Scintillating World of Interest Rates

When the Fed raises interest rates a half point, the world market reacts. But why does this tiny percentage make such a difference? Listen and learn!

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Episode Transcript

Speaker 1 (00:01):
Welcome to Stuff you Should Know, a production of I
Heart Radio. Hey, and welcome to the podcast. I'm Josh Clark,
and there's Charles W. Chuck Bryant seated directly across me,
within almost arms reaches, Jerry Rowland seeded to my right,

(00:22):
and I'm seated right here in my access in the
center of my own being. And this is stuff you
should know. Yeah, in person a dish, first time since uh,
the the one time three D audio experience experiment. Well,
I forgot about that. I marked it out of my head.
That's the only time we've been in the same room

(00:43):
to record since COVID was that that those two episode?
I remember the second one. I remember the first one.
It was the Ivy League hobbit thing. Yeah, because Ivy
League and three D audio or just like it's such
low hanging fruit, you know. Yeah. But we're back because uh,
you know, I put it on my Instagram. The studio
is going away. We're moving house. And surprisingly to me,

(01:07):
at least, you said, hey, guys, I would really like
to record in there together one more time. Why is
that so surprised? I don't know. You don't seem overly
sentimental about stuff like this, that's not true. I weep
a lot, yeah, but not about studio rooms though. No,
I mean I'll miss this particular room. Okay, me too.
I mean this has been I mean, I think like

(01:27):
seven of the most solid years we've ever had been
right here. Pretty solid. Although the the corner office with
moving blankets his sound bafflers was a pretty solid couple
of years to the quaint early days. I drove by
that building the other day too, and for the first
time in forever, yeah, in Buckhead, and I was just like,
do you remember there was like, for some reason, every
time we recorded at like one thirty, when we had

(01:50):
just started to get going, a fire truck with go
right outside every day at the same time. It's like
they knew, oh the memories. So that's enough fun for now.
Because we're talking about interest rates, all right. I don't
know why I picked this. I mean, I do know why,
but I just I'm so not good at this stuff.
So I can imagine an ap economics like teacher picking

(02:10):
this for for their high school class. So I think
that's kind of like a public service you've done here. Well,
I picked it because you know, the FED just raised
the rate by it was half of a point, right, Yeah,
biggest hikes in nineteen uh no, two thou Yeah, So
I saw that biggest hike and I was like, oh
my gosh, what was it? It was a half a point,
And I was like, I don't understand this, so I

(02:31):
might as well learn enough to tell other people a
little bit about it. Do you understand now, Yeah, like
that half of a percent is actually a pretty big deal.
It is, and I understand now more than ever. There's
like nine people that just controlled the economy of the
United States, right exactly. Yeah, it's true. Yeah, that half
of a percentage point is you'll see by the time
we're done with this, everybody is basically the FED goingh yeah,

(02:55):
they're really kind of nervous right now. And what they're
going for by raised in the interest rate is to
cool off the economy. We have inflation rates that haven't
been since not a good time for inflation, um, And
I mean we're talking the Great Recession was in there too, right, Like,
this is a big deal, the inflation that we're seeing

(03:16):
right now. So the FED is saying, Okay, we have
an economy that is overheating, like you want some inflation
as we'll see. But this is way too much inflation.
The prices of like everything is going through the roof.
People are getting really mad. We better do something about it.
But what they're trying to do by raising the interest
rates is to create a soft landing so that prices
come down, but they don't affect productivity and employment. That's

(03:39):
the big thing. And Ben ber Nankee put it once
back when he was still just affect governor rather than
the chair. Um. He said basically that what they were
doing was like driving a car and paraphrasing here, well, um, yes, probably,
he said the FED. Basically, what the FED does is
is like driving a car with fogged up windshield, a

(04:00):
faulty spedometer, and a brake, pedal and accelerator that when
you press it, the car has a very significant delay
before it responds. Oh, I thought you were going to say,
a break in an accelerator that just switched positions without
letting you know, which is with gender's on fire and
there's monkeys everywhere and they're angry. Yeah. The delay, sure,

(04:20):
because none of these uh you know, none of these moves.
It's an immediate impact and it's sort of a fingers
crossed behind your back kind of move. Yeah, almost always. Yeah.
And so most people who are watching this are saying
the Fed waited too long because they kept the economy
juiced for years and years and years. It just kept
getting hotter and hotter, and everybody's very happy until prices
started going on, right, So they waited too long. So

(04:42):
most most I shouldn't say most. A lot of people
who know what they're talking about, say there's a recession
coming pretty soon. So battened down the hat key indicators,
as they say. Right, So, what does all this have
to do with interest rates? Chuck, let's wrap well, I
mean this is we'll get to the Fed, but this
is generally about interest rates. The good news is everything

(05:03):
else about interest rates is pretty basic. Uh. We are
a nation and and and and a lot of ways
a world that operates on loans and interest in barring money,
and then banks borrow money from each other, and then
the Fed lends money to banks, and it's just it's
a it's a weird thing. It's a weird world economy

(05:24):
that has been created over the past several hundred years.
In this country, there's a lot of shiny shoot suits.
People break your arms. Yeah, it's basically what it's all
based on, sure, But it's all based on the fact
that if you want to buy something as a person,
uh and you know we're focusing on the United States here, uh,
and you don't have the money, it's no big deal
because you can get credit cards. If you want to

(05:45):
pay large interest rates, you can get home loan or
a car loan, because not everyone can shell out, you know,
twenty two fifty grand for a car over my ch
house's costs now eight eight million dollars. And you know
there's risk get involved anytime you lend money and depending
all of it really comes down to the risk of
the loan as according to what the interest rates gonna

(06:08):
end up being. Right. So what we're talking about now
our interest rates on the micro level, like the you
and me level, Like you're saying, how buying car, buying
credit cards, all that stuff, and it's it is it's
really basic, like you were saying, where um with it?
With interest rates. If you go to get a loan, say,
they're gonna look at a few things like what are

(06:28):
you gonna buy? I'm gonna buy a really cool vintage
poison T shirt on eBay ok Okay, it's like fifteen
grand easily, I want to borrow some money to get
that T shirt, that's right. Um, So they're gonna look
at my whoever I borrow from is going to look
at my um my credit score. Um, especially if it's

(06:50):
an unsecured debt, right Yeah. Unsecure debt is basically any
kind of credit card debt because they can't come and
take away anything. Basically, they're not going to take my
poison shirt if I default on the loan. The way
that they get you is they affect your credit, but
I still get to keep the poison shirt. So who's
the sucker here, right? As opposed to a secured UH debt,

(07:12):
which is you've got like a home mortgage, because they
can come and take that right. So getting back to
interest rates, then that would mean that since the bank
that lent you the money to buy your home can
legally seize your home because it's a secured debt, they're
going to charge you less because at the end of
the day, if you default, they can take your house.

(07:32):
The credit card is going to charge you a higher
interest rate because at the end of the day, if
you default, they can't take that poison shirt. So they're
going to charge more. And the reason that there's a
difference in charging more or less is because the entire
point of interest is that's the price you're paying for
somebody to loan you money in exchange for them taking

(07:53):
a risk, because there's always a risk that you're going
to not pay it back, even if you have great credit.
Something could happen. Um, you could break bad or something
like that. Who knows, but there's always a risk. And
then that's what interest is. It's it's you're it's the
money they make for loaning you that money and taking
that risk. That's right. Uh, And it's a little it's

(08:14):
not counterintuitive, but it kind of works both ways because
if you had the collateral of like let's say a
home mortgage and they can take that house, that's gonna
be a much lower interest rate, like you said, than
the credit card, but it's also gonna be higher in
some ways because it's a long term loan. Uh. If
it's you know, it's kind of a negative outlook. But

(08:34):
I think that banks look at people and say, well,
if you have a thirty year home mortgage, like, I
don't know what you're gonna be doing in twenty seven years,
Like you may be broke, maybe destitute, you may be
in the hospital and have no money anymore, So that's
gonna be a little higher. Which is why if you can,
like people always I mean financial people, I'm not one
of those, but they always recommend you, like refire your

(08:56):
house and bring it down to a fifteen year loan
because it's risky and it'll be a little bit less
of an annual percentage rate. Right. And then one of
the other reasons if you've ever looked at a house
or gotten a a mortgage, um, there's a big difference
between the rate your charge for a fifteen year and
a thirty year not just because there's a longer chance

(09:17):
for you to default on the loan, but also because
over the course of thirty years, inflation is going to
actually eat into the amount of money you pay that
bank back because it's going to depress the value of
the dollar over time. Right, So when that bank is
getting your hundred what's left on your hundred grand years
from now, it's not gonna be the same as the

(09:38):
value of that dollar now. Right. So there's actually two
types of interest that you pay on say like a
thirty year mortgage, or even a fifteen year mortgage, and
that is the nominal rate, which is the rate you
agree to, say ten percent, which is astronomical. It don't
ever take a homeland out with a ten percent mortgage
interest on it, right, Okay, Um, that's just a that's

(10:01):
just a tip from me. Um. But over time, as
inflation grows, um, let's say over that that fifteen years,
inflation grows a total like four percent, you're actually paying
the bank bank back, or they're actually getting back the
value equal to about six percent of what they lent you.
And what's that called? That is the real interest rate? Right,

(10:24):
that's right, okay, I remember wake up everybody. By the way,
all right, and by the way, Jerry's eating over there,
and that's there's just nothing more normal and relaxing than
us sitting in a room and Jerry chomping down next
to us. I just want to acknowledge that it's kind
of nice. It is nice. She's not eating me, so

(10:45):
though this time it's the only thing missing from this.
You know, most people fall asleep to like white noise
or the sound the ocean. I have wanted just Jerry chewing.
Let's be right to bed. All right, So I guess
that's like just the basic over view of how regular
interest rates work. It's really easy. It's very basic. It's
the price you pay to borrow money rather than saving

(11:06):
up to spend. Yeah, but no one cares about that
stuff because you you know, you try and get your
credit card rates down, you try and have good credit,
and you buy a house, you try and get the
best rate you can, and then it's all kind of
said and done. But what everyone sits up and takes
attention is when the Federal Reserve. And by the way,
if you ever want to just send me into traffic,

(11:28):
we should just do a whole podcast on the FED.
I don't understand why they talk the way they do,
like they're purposefully obtuse. I think like it's probably hard,
like you can just read their game in the whole system,
so they just want everyone to be even nice and sleepy.
I guess, so when they're talking, it's just nuts. So
when the chairperson of the Federal Reserve sits up and says,

(11:50):
all right, we think we're gonna raise some interest rates. Uh.
And by the way, banks they try to know before
they even make that announcement because they're always watching the
chairperson of the Fed and like, what they have a
breakfast this morning, right, how are they feeling today? Um.
Then that's why the recent point five percent adjustment was
just such a big deal because it can have a

(12:12):
really immediate and long term effect, which is kind of
weird because immediately like stocks are going to do all
kinds of crazy things, and then it's got this long
term effect that they hope is going to work out,
but it doesn't always because it's not an exact science. Yeah,
really good example. That goes back to um bank mortgages. Right,

(12:32):
So banks, I'm sure they carry out their own research
as well to predict what's going to happen in the future,
because they want to set their mortgage rates, their thirty
year mortgage rates today with this close a forecast of
what's going to happen with inflation over the next thirty
years as they possibly can, because they wanted to squeeze
out every real penny that they can from you from

(12:53):
your loan. Right. That's like crystal ball stuff though you
know it is, but I mean it's I think they've
gotten kind of good at it, but it's still the
end of the day, just an educated guess one of
the things they do is watch what the FEDS doing.
Is the Fed raising interest rates? Are the raising interest rates?
Does that mean that they think inflation is going up?
And the inflation is going up, then we need to
adjust our mortgage loans. Right, that's pretty simple. But it

(13:16):
just keeps going from there. So if mortgage rates increase,
home buying slows, housing prices drop, that means new houses
are being built less frequently, which means there's fewer carpenters
being put to work. That means there's fewer lumber mills
creating lumber for those houses. So those people are out

(13:36):
of work. Those people are out of work, they're starting
to default on their um their rent or their mortgages,
and foreclosures start to go up, which further depresses the
housing value or the housing market because a flood of
houses start to come on the market because of foreclosures
because banks want to offload them. Just from the FED

(13:56):
saying we might increase by a quarter of a percent
our interest rate. Yeah, yeah, that's the kind that's what's
at stake when they're speaking out in public or even
like making moves, yeah, like with without speaking at all. Yeah,
it's it's pretty scary and precarious. Um, the FED itself,
and like I said, maybe we'll do if I guess

(14:17):
we have to at some point on the FED. But
just as a broad overview of the Federal Reserve is
the central bank of the US. There twelve regional Federal
Reserve banks and a seven member board I talked about.
I don't know if I said seven people, but a
seven member board of governors in d c UH. And
it was created in nineteen thirteen too, you know, ideally

(14:38):
stabilize and secure our economy because at the time it
was sort of the wild West when it comes to banking. Yeah,
there are a lot of bank panics actually, where people
would no good make a run on a bank and
the bank would be like, we don't have any more money,
and they would go under and like people would lose
their entire savings. Yeah, I mean, it was a pretty
brilliant creation. Uh. And one of the things the FED
does a lot, But one of the things the Federal

(14:59):
Reserve does is it has a lot of cash and
it helps supply the banks that you and I bank
at with cash reserves. And um, maybe let's take a break.
That's a good Cliffhanger, and we'll talk about the fact
that banks, by law I have to keep certain amounts
of money, and it gets even more boring. I can't
believe that Cliffhanger. Okay, Chuck. Before we get into um

(15:50):
the reserve requirements of banks, I have a pretty neat
little story. Actually, we're talking about banking panics, and there
was one in two or at least there was one
bank that went under UM and they had a branch
in Sacramento that a guy named Louis Remy I'm gonna
say UM went to go get his twelve thousand dollars

(16:12):
that he'd saved up. It's about like three hundred and
fifty thousand dollars in today's money. It was like his
nest dagg right. He went to go get it out
and was told that the bank had failed and they
didn't have his money. So you know what Louis or
Louis Remy did. He got on a horse and he
rode from Sacramento to Portland, Oregon, six hundred and sixty

(16:34):
five miles in six days. He rode for a hundred
and forty three hours. Ten of those was to stop
to sleep. I thought I was going to say, to
get a new horse, because he had to do that.
He did that like in an instant, right, So for
for six days he slept ten hours to ride to
Portland's got there before the steamership that was carrying news

(16:56):
of the bank collapsed Sacramento. So he was racing the steamer,
got there an hour or two before the steamer got
his twelve tho dollars out of the Portlands brand to
the bank, and like within an hour or two of
that bank collapsing, finding out that there was no more
bank anymore. Isn't that amazing? I'm glad his flex capacitor

(17:16):
was working. Basically, that's basically what he did. But the
horse version of that man, yeah, he said, oh I
should give myself an hour. That should be plenty of time.
I never understand that in time travel movies. I don't either.
It's like, go back the week before time. Just take
it easy, maybe get like a snack. You have time,
all right, So we promise the scintillating details of the

(17:37):
fact that banks have to keep a certain amount of
money in their reserves. And that is because you know,
if every I mean it's not the eighteen hundreds, not
everyone's gonna say I gotta go to that Chase bank
and withdraw every penny all at the same time. But
they got to be protected against that. Oh, it could happen, though,
there's still sure. But the problem is once a panic starts,

(17:57):
it spreads like wildfire, because that means, well, if these
people are panninging, even though I'm not panninging, I better
go to the bank anyway to get my money out
before it collapses, before more of these idiots panic and
take their money out. Right, So, whether you're panicked or not,
it actually makes sense if there's a panic and a
run going on in your bank to go withdraw, and
it's just this chain reaction that starts. So the FED

(18:19):
protects against that by by requiring that these banks have
these reserves. Right, yes, so it's known as the reserve requirement.
It's based on a percentage of all the deposits in
that bank. It's very simple calculation. And then they they
these banks have to have non intersparing accounts at the

(18:40):
Federal Reserve to make sure the Federal Reserve can cover everything, right,
to make sure that it's like, okay, you have to
have this much, we're going to hang onto it. For you.
That's right. So they're they're taking this average every day,
but it's over it's an average over two weeks basically
to determine whether or not it's meeting that reserve requirement.

(19:00):
And here's the thing that I don't know. I guess
it's sort of surprised me. Is banks, depending on what's
going on on a day to day basis, are borrowing
and lending money to each other well to cover themselves. Yes,
so that sounds frightening, but it makes sense. But so
they've got like a pile of money, and whatever money
they have, they can make more money if they lend

(19:21):
that money out, if they put it to work, right, Yeah,
I mean that's what they want to do, is just
to get more interest. So if on one day they're like, oh,
we've len out more than we we have in reserve,
we go to another bank that has an excess and
borrow it from them and then we put it in
our FED account and everything's fine. We're within the legal
limits for those reserve requirements. Right. But if they run

(19:44):
out of you know, banks to trade with basically at
the end of the day, then they can go to
the FED and say big Mama, we need a little
money from you, actually, right, And the FED doesn't like that,
so they actually charge banks more for the UM for
to borrow money directly from the BED for overnight requirements.
That's right, but it's ironically called the discount rate even

(20:04):
though it's the larger of the two rates. The other rate,
where a bank borrows from another bank overnight to satisfy
the FED reserve requirements, that's called the UM Federal Funds rate. Right,
I answered my own right, I thought you're waiting on me. Uh.
And within that discount rate, there are a few different tiers, uh,

(20:26):
kind of just like you would scale or a tier
any loan. You've got your primary rate, which is the
lowest one, and that's you know, if you're a great uh,
if you're a great bank and good standing, you're gonna
get that rate. You've got the secondary rate. Uh. And
that's if I think this is by the way, is
Dave Ruse but from house works dot com. Uh, And
Dave said, slightly less sound institutions Galloping Gulch State Bank. Yeah. Probably.

(20:51):
And then you've got your seasonal rate. And these are
very small banks with that are based sort of around
seasonal economies. Like tourism or agricultural something like that. Yeah,
because like and when when it comes time to bring
in the crops for harvest, all the farmers come and say,
I need some money to get this stuff to market.
I need loans, and those banks get strained at those times. Yeah.

(21:11):
Or there's lots of great I feel old timey heist
movies where uh, someone will you know, like during crop season,
they'll know a bank will have just be flooded with
cash on a certain afternoon. Yeah, there's a movie you're
talking about, Raising Arizona that was definitely the case. Okay,
was that it? But Wisdom, it's been in other movies.
To Familio Estevez, is that a bank rubber? He was

(21:35):
like a Robin Hood where he I think he robbed
banks to get rid of the deeds so that the
farmers could couldn't have their farms foreclosed. I never saw that.
I know the movie you're talking about that, I saw it, Wisdom,
I saw it. Hey, while we're talking about movies, I've
been meaning to give a shout out to so our
friend Toby his production company made a movie called The

(21:55):
Green Night that slipped under the radar, not for me,
buddy that's on the theater. Wasn't that an amazing movie?
It is and one of the most like, uh, just
sort of like in a in a day in time
where everything is a Marvel movie or something, to to
have something so original based on like an ancient tale.

(22:16):
It was. It was great. It was so David Lowry
is the director, and he's just a straight up a tier. Yeah,
he's just making the movies that he wants to make.
And their production companies called Sailor Bear. I think I'm
so mad that that got snubbed at the Oscar. It's crazy.
It's like cinematography and set design and costumes like it
got nothing. It's crazy. It's wonderful. Yeah, and I think

(22:38):
picked it up, which means their streak of like amazing movies, yes, flawless.
It's a flawless streak they have. They haven't stumbled once
in the entire the entire history of Come at me.
If you've got a bad movie, it's not you know
what I hear? Crickets? Is there a movie called Crickets?

(23:00):
Maybe there's a movie out there called egg Egg from
the sixties. Really yeah, I haven't seen it though, I
just read about in Uncle John's Bathroom. Reader, I thought
you were talking about the movie head the Monkeys, Monkeys
right where they they tried to do the whole smile thing.
Oh really, I think so they were there was kind
of their answer to the beach Boys. Interesting. Alright, Uh,

(23:24):
can we just keep talking about that stuff? All? Right?
Here we go, Let's get back on this. The Fed
funds rate. Is that what we're talking about. Yeah, we're
talking about that's the rate that banks charge one another
to borrow overnight to satisfy the reserve. Right, And this
is the one that is just very simple supply and demand.
If there are uh, there's a lot of cash and

(23:47):
a lot of banks, then the rate is going to
be lower. If there's demand for more money, then it's
going to be higher. The Fed controls all of this
in a roundabout way. Yeah, I mean they kind of
control all of it in the roundabout way. And like
also the economy like a Rube Goldberg mouse trap kind
of way. Like it'd be so much easier if they
were like, this is what you guys can charge one

(24:09):
another as an interest rate. Yeah, but they don't do that.
They let the market decide. They set a target and
then let the market work and then they manipulate the market.
That's right. So if the FED wants to lower that
funds rate, it's going to buy securities from those banks.
There's gonna be a more cash on hand all of
a sudden. If they want to raise the funds rate,
they're gonna sell government securities, which are I mean, anytime

(24:31):
you start talking debt instruments, I just go a little
crazy with excitement. But government securities are just debt instruments.
They're used to fund government operations. Uh, it's basically so
like the way I understood it was if Uh, like
a lot of it. It's military spending and operations, and
it just keeps them from having to like raise and
lower taxes a lot because they want to keep taxes

(24:53):
kind of stable. Right. So yeah, So with all that
deficit spending, what they're doing is if if if the
government could operate just on the taxes tax revenue it
brings in, it would be it would be neutral, It
wouldn't be operating at a depth that the wouldn't be
any profit would be great. But it spends more money
than it takes in, so it has to issue that debt,
which is basically loans in the form of treasury bills.

(25:15):
And that's what the FED is doing when they're out
there buying or selling treasury bills, these debt securities. They're
they're taking um debt in or out of the market.
They're adding cash into or out of the market. And
it's not like banks who trade with it's just a
very select elite group of of what it's called primary

(25:36):
dealers who buy and sell um these treasury bills with
the Fed. They don't have a choice in this. If
you want to be a primary dealer, you have to
buy or sell depending on what the Fed wants to
do at any given time. Right, And so by doing that,
they say, all right, we want to buy a bunch
of treasury bills because we want to inject cash into
the market. UM. Here like sell those to us. Here's

(26:01):
the cash. And by the way, we're not actually giving
you this cash to go do anything with. This cash
goes into your FED Federal Reserve account. Remember, and this
is really important, Chuck, that account is non interest sparing.
It makes zero sense in both sense of the word
to um leave money in there when you, as a

(26:22):
bank could make some money off of it loaning it
to other banks. So the more money that the FED
is put into those accounts, the more money there is
to loan, meaning that interest rate drops. And this is
also arcane. And again this is like a dozen people
who deal with this on a day to day basis,
But it has a ripple effect in that, um, when

(26:45):
you when you lower the federal funds rate, those banks
in turn end up lowering their rates to people like
you and me. It has a cascading effect throughout the economy. Yeah,
Like I think I used to look at the Federal
eight and when they would move that and think that's
the home mortgage loan rate. Essentially it translates into that.

(27:07):
It does in a certain way for sure, but I
thought the Fed sort of set that until last week.
But the same but it's just you know, it's it's
passed along on you know, like you said, both ways,
either in better interest rates or worse interest rates for
everything across the board for regular smells like us. Uh,

(27:28):
there's also I mean, you can also buy you know,
we'll talk about inflation in the stock market, which is
where I get really confused. But um, remember how I
was talking about, like the interest rates have to do
with nothing but risk. Basically, if you want to buy
if if you want to get out of the stock
market and just say I'm only going to invest in
like bonds and things like that in securities, then uh,

(27:50):
you're not gonna make much money. The return on those
is very very low because their government backed, which means
the risk is very very low. People play the stock
market because ideally you can get it like eight uh
more money every year that you're doing it, whereas you're
making like half of a percent. And that's the same way.

(28:11):
Like you know, you you you make interest when you
have money in the bank because the bank wants to
use your money, so they're kind of taking a loan
from you every day. You just don't realize it, but
you get just a tiny less This why it doesn't
payage to keep a ton of money in the bank,
because you're making a tiny amount there too. Yeah, and
so the federal funds rate UM has an effect on

(28:32):
that as well. Right in the real world with the
stock market. So if the federal if the Fed takes
a bunch of money out of the out of the
market um and floods the market with with like um
treasury bills, right those treasury bills are easy peasy to
come by, which means that they're worth less, which means

(28:54):
that people are going to get less money from investing
in them, which means they're going to turn to the
style market because you're gonna make more money, right even
though it's riskier. That juices the stock market when interest
rates are low. When interest rates are high, meaning the
Fed has soaked up a bunch of money, um, and

(29:14):
they have sold a bunch of those those like treasury bills. Um.
That means, yeah, I think I'm right, it's easy to get.
That means that the interest rate has gone up, which
means that you can get more money from those treasury bills,
which makes the stock market less attractive to people who
are investing in it, which usually signals a cooler economy.

(29:38):
That's right. And I guess the final effect here before
we break and then talk about inflation, which is so
so fun, is if the FED lowers the funds rate,
it's going to decrease the value of the dollar on
the exchange market, on the foreign exchange market. And that
is um, it's a little counterintuitive, but um, a little

(30:01):
bit of a like a long term drop like the
is not good you don't want the dollar to decrease
and stay low. But on the short term, on the
near term, um, it can be good for the American
economy because if the dollar drops uh, then our money
is not gonna be worth this much elsewhere. So buying
things like products, are goods or services from overseas, it's

(30:24):
gonna be more expensive. So they might turn to the
home front to buy some of those goods and services,
which can actually inject uh like kind of supercharge the
local American economy on the near term, right, And so
that actually can in turn lead to inflation accidentally. So
if you have low interest rates, that means that money

(30:45):
is abundant and cheap borrowing is cheap. A lot of
people are out spending because interest rates are low. Um.
So the dollar is actually deflating, which means that prices
are going up. Right in some cases like this is
actually good. The Fed wants to keep inflation at about
two growth per year, So prices are going up. And

(31:06):
the reason why the Fed would want to do that,
as we'll see, is because there um, if you know
that prices are going to generally continue going up, you're
gonna buy something today rather than putting it off for later.
They love you spending money. That's what they want is
Americans buying things constantly, exactly. But you so you want
prices to go up, but at a steady rate and

(31:28):
a manageable rate. UM. The problem is is if you
if if money becomes too abundant in the economy, UM,
prices start to go up really quick because a lot
of people have money, but there's not enough supply to
satisfy that demand, which drives prices up even further, which
is pretty much the situation that we find ourselves in now.

(31:50):
So to deal with this, the FED has raised interest
rates in the hope that it becomes more expensive to
borrow money, people will spend less, and then it becomes
more lucrative to save money because interest rates for like
loans or for CDs for savings announce. All that stuff
goes up, all right, and so you're spending less. Prices

(32:12):
hopefully come down, but not so much that people start
to get laid off because consumer demand has bottomed out.
That's where we're at right now. This is the tight
rope that we're watching. The FED kind of transverse right now.
That's right, they're on a penny farthing on a tight
rope with a little tiny umbrella that's comically small, comically small.
All right, well, let's take our final break and we'll

(32:34):
finish up with a little bit on inflation and how
the interest rate continues to affect that right after this.

(33:07):
So I have a feeling I'm trying to think of
the stuff you should know, audience right now, all of
our friends out there, and I feel that of them
will not hear this part. Okay. Uh. The ones in
that that that managed to stick this one out are
probably like, I'm sort of learning this, guys, but it's
really confusing. And then there's ten percent are economists and

(33:30):
people that are sitting back and laughing and going, Nope,
they got that part wrong. Wrong again. Alright, guys. Yeah,
I feel like if you took all of the information
in this episode and cut and paste it into a
more coherent way that's Jerry's job, it would be it
would be Yeah, it would be like we we got it. Yeah.
I think we just explained it in a really confusing way. Probably,

(33:53):
so we're a little all over the place. Um. All right,
So we talked a little bit about inflation that they
inflation is good in a slow and steady way. Would
you say two percent a year? Yeah, that's what the
FED shoots for. Shoots for two percent. Um. No inflation
at all is is not good because that means you're
looking at deflation. We talked about stag inflation in one

(34:17):
of those a long time ago. What does stag inflation?
Was that it? Yeah? Yeah, so stagflation is no good.
I think that's when the rate is above like a
certain percentage, and unemployments below a certain percentage, and there's
one other indicator, uh, productivity I think maybe declines. Maybe,
so prices remain high and keep going higher, but the

(34:39):
wages are tumbling and people are getting laid off, and
like the economy is starting to cool, but prices are
staying high. Yeah, because ideally with inflation, wages are kind
of going up in lockstep. Yeah, Like that's what you want.
That's what you want ideally. I don't know the last
time that that actually happened. You're probably right, so um,
so you do want some inflation, but you don't want

(35:00):
too much. Inflation is the upshot of it and a
lot of um. We also did one on inflation two
is um. I can't remember what the name of it.
But it was just this past like June, I think,
I look really yeah. Um, So there's a couple of
explanations about how inflation works, and I don't know that
one is necessarily right and the other is wrong. I

(35:20):
think it just depends on the context, yeah, or the
way you're looking at it, seems like. But they both
seem really familiar. So I think we talked about them
in the inflation episode we would have had to have.
But one is called the demand pole theory, and that's
kind of the explanation for what's going on right now
that because of government stimulus, checks, because um of productivity
being through the roof, because interest rates being really low,

(35:42):
the economy has been a wash in easy money and
people are buying, spending buying. A lot of people have
a lot of money and are ready to spend it. Also,
I think there was a lot of probably pent up
demand from hanging around your house because of COVID. Now
you're like, take my money, I want to do something,
interest saying you know, I'm so bored. It's unprecedented stuff

(36:03):
these past couple of years, and I don't think anyone
really knew what the overall effect was going to be right.
So the tight rope, if you look closely, is actually
an ultra sharp razor blade that the FED is on
thanks to this unprecedented event that we've just gone through.
That's what they're trying to deal with. So, UM, the
idea of a bunch of people having a bunch of
money wanting everything all at once, from houses to cars

(36:25):
to um, you know, game boys, maybe vintage game boys,
um to poison t shirts um Like that means that
we're all competing with one another for the finite supply
of those things, which means that people selling them things
to just supply and demand. Basically, you know capitalism and economics,

(36:46):
Those prices rise, that's inflation. That's the demand pole theory,
that's right. The other is cost push uh And this
is basically kind of the opposite of that in some ways.
It's the cost of doing business is going up. Uh.
It is sort of separated from demand in that way. Uh.

(37:07):
And they're they're all kinds of reasons this might happen.
Dave mentioned a couple that like labor unions might have
um like have to pay people a lot more money
because they negotiated a new contract or something. Um. Exporting
foreign goods shoots through the roof or something, or maybe
there's a new administration all of a sudden, there's new
taxes going on. But basically it's cost push because the

(37:31):
rise in cost of doing that business, any business, is
going to push the price of the products higher and
higher and higher. Right. But it has nothing to do
with demand necessarily. It's just no, it's become the cost
of doing business has become more expensive. Right. And now
this is where like I did pretty good with the
stuff until interest rates affecting inflation because it seemed, I

(37:55):
don't know, it just seems so uh rigged, and like
I hate saying the word now, but that's the whole
that's the whole thing. That's the entire point of what
the Fed is doing. By raising that interest rate by
half of a percent, they're trying to manipulate the economy
and they're trying to do it in just the right

(38:16):
way so that they can keep those inflation, keep inflation,
slow it down, they can keep it in check. But
at the same time, they don't want to bring prices
down so much that businesses have less incentive to produce goods,
right because right now, with prices really high, businesses are
doing everything they can to get out as many widges
as possible because they can sell them for historically high

(38:39):
prices right now. If prices fall, eventually you get to
a point where businesses are like, it's not really worth
the investment. I I don't need this many people to
make this many whiges anymore. People start laying people off,
so unemployment starts to go up, and all of a sudden,
you've overstepped. You've cooled the economy too much by adjusting,

(39:00):
by targeting inflation, by adjusting the interest rate. That's the
precarious position that they're in right now. They're trying to
create that soft landing to get prices back down to
a normal rate of inflation without cooling off the economy inadvertently.
That's right. And uh, what I'm meant to look up
to see is it always by quarters of a point? No?

(39:22):
I mean they just did a half of a point No? No, no,
But but that's too quote. Yeah, is there any an
increment that's less than not that I've ever seen? Okay,
so they go a quarter at a time, I feel
like three quarters yeah, yeah, I think the most I
saw was one point seven five or something like that,
and that was back in two thousand, two thousand, I think,

(39:45):
so the last time they had such a huge hike
um as a as a half of a percent, it
was actually like two and three quarters of a percent
because I think of the dot com bubble, and they
probably overstepped because there's a recession after that, right and
in the housing uh situation. Yeah, that came later, right,

(40:05):
but that was I'm sure all of that has affected
all the tendrils effect one another. I'm sure. I think
there was somebody who had a theory that every recession
was connected to the last one somehow. Well, they say
we're headed for one uh. Since the nineteen fifties. Um,
there are economists that say every time we've exceeded four

(40:25):
percent inflation unemployment was below five percent, then recession comes
within two years of that moment, and that has happened
here in April two, right, So they're they're saying, like
recession is probably becoming historically speaking, Yeah, and so there's
some tips if you want to prepare for recession. It's
not necessarily the end of the world. Um. One thing

(40:46):
is because job market is so hot right now. If
you've been sitting there thinking like maybe I'll get a job.
Go get a job now, so you don't have to
like try to get a job during a recession and
you can already have the job. Um, if you're thinking
of selling your house, especially if you can downsize, this
is a good time to sell because the housing market
is really high right now, but you can expect it

(41:07):
to come down if we go into a recession. Right,
Set a little cash aside if you can sure. And
then if you're an investor, if you have stocks sticks
your plan, don't panic, don't worry, just stay the course.
You can weather a recession in your stock prices will
eventually go back up on the other side. Yeah, you
know what, there was one thing I meant to mention
before that's worth pointing out real quick. Is that remember

(41:31):
we were talking about the Fed sets this rate that
banks you know they lend each other money and stuff
federal something federal funds. Right. Yeah, they don't actually say
like you have to use this rate. Like banks still
negotiate that with with each other, but they're they're saying,
like that's the target rate, and then they do things
to try and nudge these banks toward that, right, Right,

(41:51):
And that's what they're doing when they're buying or selling
bonds on the market, they're injecting or removing cash to
make that the bank's actually charged closer to that target rate.
They've said that's how they manipulate. But it's not like
a bank says, well, we can only turn to this
because the FED said, So that's what I'm saying. It'd
be so much easier and so much more straightforward. The

(42:12):
Fed said, this is what you can charge each other
for the overnight rate and then adjust that rather than
setting a target and then manipulating the markets. Yeah, but
then that takes a negotiation out of the deal, and
like it's just no fun. Yeah, it's probably it. Actually,
you got anything else? I got nothing else? Well, that
was a good first take. Let's start over and try

(42:32):
it again. Well, since Chuck's made that sound, of course,
that means it's time for a listener mate. I'm gonna
call this uh new gin and tonic recipe I want
to try. Yeah, it sounds good. That just came in.
Hey guys, been listening for you years down end and
was keen to learn about more about Champagne. As a

(42:54):
fan of the Bubbly beverage but I got an extra
treat when he went on a tangent about gin. Uh.
This must have been a select champage. Yeah, Sampaigne one
came out this past Saturday. Yeah, in real life, I
r l so. Although I must say the best gin
in the world now comes from Australia, arguably Tasmania. I'm
also a big fan of the Saint George share war
and chuck. It does not taste like feet. Maybe you

(43:15):
should stop soaking your socks, your lime in your socks.
So this is a cocktail recipe I'm going to try
because it all sounds lovely. This is from Meg. Just
get your basic London dry gin and tonic, but instead
of just squirting a line in there, um, squeeze some
orange in there and add a full rind and then uh,

(43:37):
rub of fresh rosemary stick. Get that thing activated and
then put that in there and stirred around. You sound
like you're making this listener mail up. No, no no, no,
and then uh and cracked pepper. So you basically got
a gin and tonic with orange, rosemary and black pepper. Yeah,
be careful with the pepper though I've had it before
with even just not cracked, but whole peppercorns. You can

(43:59):
act sidentally bring your throat pretty good, Yeah, because the
gin like gets it ready and the black pepper finishes
the job. Okay, well I'm gonna try it out. That's
from Meg and Australia. Just remember a little goes a
long way. A little goes a long way. Thanks a lot, Meg,
we appreciate that. Um we love new gin recipes. Really,
any kind of recipe. Yeah, if you want to get

(44:22):
in touch with us like Meg did and give us
a recipe or just say hi or whatever, you can
send us an email to Stuff podcast at iHeart radio
dot com. Stuff you Should Know is a production of
iHeart Radio. For more podcasts my heart Radio, visit the
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