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Yahoo Finance’s Dave Briggs and Seana Smith discuss the March CPI report and the newly released FOMC meeting minutes.
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BREAKING: Recession News

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Inflation has been a topic of discussion for the Federal Reserve for quite some time now. With the release of Fed minutes this month, it has become clear that rate hikes are likely to happen in the near future. The Federal Reserve’s aim for rising interest rates is an attempt to combat inflation before it gets out of control. However, this strategy can have negative consequences for the economy, including the possibility of a banking crisis and a recession.

One way the Fed tries to reduce inflation is by raising interest rates. This makes borrowing more expensive, slowing down spending and reducing demand for goods and services. It also makes saving more attractive, which can lead to decreased consumption and economic growth. According to the Fed minutes released in August 2021, the board is contemplating whether to start the tapering or the gradual reduction of the $120 billion monthly injection into the economy through bond purchases.

While the goal of reducing inflation by increasing interest rates is commendable, it can have an unintended negative consequence. In the wake of the 2008 financial crisis, banks were forced to reduce risky lending practices and increase their reserves. However, higher interest rates can put pressure on the banks’ profit margins. With reduced lending opportunities, there may be increased odds of a banking crisis looming.

Moreover, the expectation of a recession has also been fueled by the Fed minutes and the prospect for interest rate hikes. A recession is characterized by a decrease in economic output, high unemployment, and reduced purchasing power of the population. With consumers’ debt levels still at an all-time high, an increase in interest rates could significantly reduce disposable income and lead to a decrease in spending. This decrease will result in lower economic growth and can ultimately lead to a recession.

However, it is important to remember that the Fed has not yet raised interest rates. They are only analyzing the possibility of doing so. The Fed is well aware of the delicate balance they need to maintain between economic growth and inflation. They are taking a proactive approach to inflation by trying to stay ahead of it while also being mindful of the negative consequences that may follow. It remains to be seen what the Fed will do, but with a recession looming, it is essential that they get it right.

In conclusion, inflation is a tricky subject, and the Fed is handling it with caution. It is hoped that the steps taken by the Fed will lead to controlled inflation without negatively impacting the banks, the economy, and especially the well-being of the people. It is essential that the Fed strikes a balance that mitigates the risks of inflation without disrupting the fragile growth the economy has achieved after the pandemic.